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What does 'ESG friendly' really mean? I FT - YouTube
Channel: Financial Times
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if you've heard about esg investment
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you know that it refers to companies
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that focus on environmental
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social and governance issues what we'll
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talk about today
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is how it is fundamentally changing the
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investment landscape
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there are a variety of motivations
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behind the esg movement
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while some investors want their money to
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go towards companies and projects that
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will change the world
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others simply want to minimize the harm
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that their investments have on
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communities and ecosystems
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then there is a third group who are
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looking to use esg principles to protect
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their
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own portfolio from potentially negative
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impacts but no matter the motivation
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all esg investors want to make a return
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on their money
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if it sounds straightforward just know
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that this is much harder in practice
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than in principle for example how do you
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decide
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whether a company deserves the halo of
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being classified as esg friendly
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take tesla the company makes electric
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cars which are better for the
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environment of traditional ones
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so you would think this investment would
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have a positive effect on the
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environment
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but not so fast hey everyone
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there are questions around the
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environmental impact of mining nickel
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which tesla uses in its batteries and
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is the electricity used to charge your
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car coming from renewable or
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non-renewable sources
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tesla has also announced that it made a
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1.5 billion dollar investment in
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bitcoin and as has been pointed out by
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bill gates
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mining bitcoin is an environmentally
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damaging activity
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because of the energy it requires so
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what do you do if you want to invest in
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environmental progress
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do you buy tesla shares or not
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the answer is not so clear-cut
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[Music]
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these days most people don't have to
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make that decision
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a rise in passive investing means that
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most folks choose an
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index tracking fund like an etf or a
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mutual fund
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which puts their money into a basket of
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company stocks that track and
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index to create an esg focused index
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simply means that the companies in that
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basket have met certain criteria
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that make them esg friendly but what
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does that
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mean in reality well it's still up for
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debate
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nonetheless the sheer number of indices
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that provide an esg focus have exploded
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from 2019 to 2020
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increasing by 40 according to the index
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industry association survey
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the amount of money going into esg
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assets has also exploded
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in the u.s in 2016 there was 8.1
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trillion dollars in professionally
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managed esg assets according to the
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forum for sustainable and responsible
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investment
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by 2020 that number grew to 17.1
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trillion dollars
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which is more than a 100 increase in
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just four years
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and as for figuring out which companies
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to put in those indices we talked about
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many index providers rely on various
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metrics that score companies based on
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their esg
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impact examples of metrics are things
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like exposure to carbon intensive
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operations
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energy efficiency human rights concerns
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etc
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however there can be discrepancies
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between the ratings agencies
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even when they're scoring the exact same
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company
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often index providers will have a
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committee that helps make decisions on
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which companies to include and which to
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exclude
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this is important because the company
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stocks they include will benefit from
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more investor cash
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but the subjectivity of classification
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has led to controversy over whether some
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funds are truly investing in companies
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that fulfill the vision of esg
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or whether some index providers are
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merely using it as a marketing term and
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putting the
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esg label on funds that don't really
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merit it this is why it's so important
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for investors to
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carefully read the methodology and
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prospectus behind
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an esg index before they invest
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to ensure that they are getting
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something that truly reflects their
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goals
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so a question you may be asking right
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now is whether the returns of those esg
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funds are better or worse than
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traditional investments
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in this chart showing the performance of
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an esg fund versus a standard fund
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you'll see that they perform pretty much
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in parallel to one another
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this is just one example of course some
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esg funds may do better than the
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benchmarks
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others may do worse but the beauty of
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esg
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is that in general investors don't need
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to worry about sacrificing performance
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for doing good perhaps that is why we
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see so much money
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jumping on the esg bandwagon
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