ESG: a Risk management Tool for Investors
BY: Omar Safi
Environmental, social, and governance (“ESG”) funds have grown rapidly over the world and have become a major source of investment for investors and managed assets. ESG has become the center of attention for investment and management, as trillions of dollars have accumulated in investments for ESG related products. The prominence and rise of ESG funds have caught the attention of millions of investors around the globe. ESG creates an avenue for investors to assess a corporation’s environmental, social, and governance practices and to make investment choices that are more aligned with their investment goals by anticipating future performance of ESG factors. ESG focuses on holding corporations accountable and to protect the environment and communities these corporations work in.
However, while there are many in favor of ESG investments, there is also opposition. ESG is a hotly debated topic in the United States and is the subject of political legislation. Anti-ESG legislation was passed in twelve states in 2023, and pro-ESG bills have been proposed in eleven states. ESG has contributed to the polarized political landscape in the United States due to certain states wanting to protect industries such as oil and gas. Additionally, some ESG regulations call for a firearms boycott, which further divides lawmakers. While this debate continues in the United States, the European Union has taken the lead in ESG regulation and has created ESG requirements. The European Union has implemented stricter disclosure requirements for ESG regulation to create transparency and awareness for investors.
ESG can be used as a risk management tool for investors in analyzing a corporation’s carbon footprint. ESG factors can be used by investors to identify future risks with the corporations they are interested investing in, thus being used as a risk management tool for investors. Investors then can take information from the ESG scores of a corporation and use that to make an informed decision.
Lastly, critics have questioned whether ESG can produce positive returns for investors. ESG has the ability to improve risk-adjusted returns for investors by considering the future risks and creating transparency for investors. ESG funds have proven to perform better, or just as well, as conventional funds. Investors should not be discouraged by ESG’s critics because ESG will continue to grow and be a tool for investors to use.
Key Sources:
Elizabeth Pollman, The Making and Meaning of ESG 3 (U. Penn. Inst. for L. & Econ., Working Paper No. 22-23, 2022).
Adam Gorley, What is ESG and Why It’s Important for Risk Management, Sustainalytics (Mar. 2, 2022). https://www.sustainalytics.com/esg-research/resource/corporate-esg-blog/what-is-esg-why-important-risk-management.
Leah Malone & Emily Holland, ESG in Mid-2023: Making Sense of the Moment, Harv. L. Sch. F. on Corp. Governance (Aug. 31, 2023) https://corpgov.law.harvard.edu/2023/08/31/esg-in-mid-2023-making-sense-of-the-moment/.
Samuel Brown, Scott Kimpel, Alexandra Hamilton, Julia Casciotti, Emerging Esg Frameworks Global Implications and Local Impacts, Nat. Resources & Env’t at 19 (2023).
E. Napeoletano, Environmental, Social and Governance: What is ESG Investing?, Forbes, (Dec. 4, 2023, 9:30 AM), https://www.forbes.com/advisor/investing/esg-investing/.
Karin Rives, States’ anti-ESG push leaves patchwork of policies, unclear mandates, S&P Global Market Intelligence, (Aug. 22, 2023), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/states-anti-esg-push-leaves-patchwork-of-policies-unclear-mandates-77133331.
Joan Michelson, Wave of ‘Anti-ESG’ Investing Legislation, New Study Found, Forbes, (Aug. 29, 2023, 7:45 AM), https://www.forbes.com/sites/joanmichelson2/2023/08/29/wave-of-anti-esg-investing-legislation-new-study-found/?sh=51e03e757286.