The Rise of ESG Investing; Blackrock Capitalizes
By Brian Hilyard
Money and Investing Writer
Blackrock, the world’s largest asset manager, has launched an Environmental, Social, and Governance fund. ESG criteria have become popular among socially conscious investors looking to back companies that share their values, whether its sustainability, reinvesting back into local communities, or leadership that practices good faith. Younger investors, in particular, have made this screening method popular.
In recent history, ESG investing faced criticism as it was believed that by limiting the number of companies one could choose to invest in, it came with a performance penalty. However, many studies have concluded that no such penalty exists and that ESG approaches are a potential driver of outperformance. During the March market crash, funds centered around sustainability outpaced its peers, presumably because they had low exposure to the oil and gas sector.
Investment research firm Morningstar also found that ESG funds outperformed over longer periods. However, how greatly those funds outperformed varied by asset class. For example, 80% of US large-cap equity ESG funds outperformed traditional counterparts, while only 30% of Euro corporate bond funds did.
But do the fundamentals hold up? According to S&P Global, “Companies focusing on ESG issues have achieved reduced costs, improved worker productivity, mitigated risk potential, and created revenue-generating opportunities”. When analyzing risk potential, manufacturing companies must consider the availability of inputs in the long-term, therefore, they must protect the environments that produce those inputs.
Going back to younger investors, millennials are expected to inherit trillions of dollars in the coming years, and it is reasonable to consider where that capital might be deployed. 78% of millennials respondents to a 2018 Bank of America survey stated that they consider ESG factors when investing.
Going forward, investors should put a great emphasis on ESG. However, a significant obstacle remains. There isn’t a standardized, quantifiable way of measuring ESG yet. Yahoo and Censible provide scores, but it is not clear how those scores are calculated.
Contact Brian at brian.hilyard@student.shu.edu