There’s a growing interest in “ESG” investing. Big pension funds and others are investing in companies that give high priority to environmental, social, or governance goals.
Do these goals sound vague? They are. Nevertheless, many argue that eliminating “harmful” companies in one’s portfolio and favoring those that are”doing good” can lead to financial success. Indeed, returns on “ESG” investments have been pretty good lately, partly because high-tech firms tend to be in ESG portfolios.
But last month, Robert Armstrong, writing in the Financial Times Armstrong said there is no logic to the view that ESG will lead to higher returns. In fact, the more the “wicked” companies are ignored, the cheaper they’ll be, and other investors can get higher returns by snapping them up.
The other problem is that companies meeting ESG criteria can go up or down. “Whether any of these factors [ESG criteria and others] outperform over the long run is hotly debated, but it is certain that they can suffer very long periods of underperformance.”
Another Financial Times writer, Jonathan Ford, thinks a lot of “greenwashing” is going on, and the criteria are “hazy.” Nevertheless, if people want to invest in ESG stocks, they should do so for “the fulfilment of a moral imperative.” He writes:
“Remember that impact investors should be funding something that does not seem sufficiently lucrative ex-ante to be backed by conventional financiers. Logically, then, you would expect them to receive ‘concessional,’ or lower-than-market, returns.”
For more information see how the Labor Department (which oversees many pensions) has raised questions about ESG investing.