Investing with consciousness

In recent years some investment firms have invested in companies that are not just generating a return on investment for their investors, but also achieving goals in non-financial areas. The movement known as ESG (Environment, Social, Governance) establishes standards investment companies use to screen potential investments of their clients' money. Environmental standards reflect how a company protects the environment. Policies considering climate change are most common in this category. A reduction or elimination of fossil fuels in the investment portfolio had been the major emphasis. Social goals assess how an organization handles its relations with customers, employees, suppliers, and other stakeholders. Governance examines corporate structure, board composition, business ethics and anti-corruption policies. Some believe ESG investing is new or even a temporary trend but that is not the case according to Maria Barulina, Assistant Professor of Finance and Analytics at Tiffin University. "Even though it's impossible to determine the exact time investors began to use the associated metrics, the first related index, Domini social index, was launched in the US back in 1990." One disadvantage of ESG investing is that there are plenty of publicly traded companies that attract investors who are not actively pursuing ESG goals. Companies in industries like tobacco and defense that are avoided by ESG investors, historically produce higher than average market returns. ESG investors may be sacrificing returns for their clients in exchange for making investments that follow ESG principles. Many ESG investors say they are willing to accept that compromise. A recent survey indicated that almost half of ESG investors said they were willing to take a 10% loss over a five- year period to invest in a company that "aligns exceptionally against ESG standards." On the other hand, 74% in the same study stated that valuation/price was "very or extremely important to them." The average ESG-conscious investment has a higher price, making ESG investing a more expensive strategy. This desire to create a higher return on investment has created a backlash from investors protesting the ESG movement. Most people make investments to maximize returns, not save the world. Even the vast majority of ESG conscious investors are concerned with a good return. Choices made by investment firms do not only affect the rich. Over half of all Americans have money invested in the stock market, either in individual stocks, a stock mutual fund, or in retirement funds such as a 401(k) or IRA. BlackRock CEO Larry Fink is one of the targets of the anti-ESG movement. He has been accused of putting sustainable investing goals ahead of returns to impress the leaders of the firms in which his company has investments instead of trying to maximize the returns of his clients. BlackRock controls roughly $8 trillion in assets, making it one of the most powerful pro-ESG voices in the financial world. Several states have withdrawn their employees' pension funds from the investment giant, accusing it of becoming too concerned with ESG initiatives instead of maximizing returns. Some are more effective in using ESG factors that others when attempting to gain financial benefit from their contribution to the long-term financial performance such as lowered risk or increased returns added Barulina. "In-depth research is necessary to assess your risks before investing in order to avoid gambling." Most agree that ESG companies, and those who invest in those companies, show some level of social responsibility. But the first fiduciary duty of investment companies like BlackRock and others is to act in the best interest of their clients. Perry Haan is Professor of Marketing at Tiffin University. He can be reached at haanpc@tiffin.edu.