A hot topic in the financial industry commentary for some time has been the interest in investing in firms that seem to meet environmental, social and governance criteria. This type of investment will appeal to some clients as a way to support businesses that are taking steps that may make a difference on various issues. However, at this point in time, such investments have not really caught on in terms of participation by investors.
One major roadblock seems to be the absence of any transparency and clarity in terms of what the investments – funds and ETFs comprised of shares in the chosen firms – actually do. One ESG investment may be very different from another and even with digging into the largest holdings, it is not always clear how effective the investment (and the underlying businesses) are at what the investor might choose to support. A company might be at the cutting edge on one aspect of ESG and a lollygagger on another. Which aspect should the investor see as decisive? How much ESG activity is enough to make a business “right” for an investor?
Alternatively, if an investor has a desire to focus on a particular part of the ESG concept, how easy will it be to find a fund or ETF that does the same? Many of the offerings are a hodge-podge of businesses that may or may not be doing what we would call ESG conscious activity. An investor might logically prefer an investment that is very specific and substantial in its commitment to a desired goal(s).
The other major roadblock appears to be the costs of these investments. Investors typically invest to make money on their investment and, if they can feel that they are doing good at the same time, it is a win. Expense ratios and costs for many investments described as ESG are rather higher than many other offerings. New ESG products are coming that will have lower costs and that may be an incentive for investors currently on the fence to put their money into ESG.
The takeaway is for investors to know just exactly what the investment is providing that is related to ESG in any meaningful way and to understand the cost/expense or other drag on performance that will apply. Once you know, you can decide whether that investment is for you.