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ESG … What ’ s The Real Impact ?
The price Americans are paying at the pump has some wondering if ESG is to blame .
By Haleh Moddasser
Recent geopolitical events have some americans blaming environmental , social and governance investing for everything from the high price of oil to the invasion of Ukraine . this is a legitimate concern , as it appears the very essence of what ’ s good for the world is changing before our very eyes . it is , after all , oil the world now covets , and it ’ s the high demand for it that is fueling Russia ’ s invasion ( put aside the sky-high prices we ’ re paying at the pump ). are esg investors wrong to demand cleaner energy practices from public companies ? are they wrong to demand tighter gun controls in the United states when we ’ re sending lethal weapons to Ukraine ? like most things in life , the answers are nuanced . i ’ m the author of a book dedicated to esg investing and a partner of a wealth management firm that recently launched an esg platform — one that ’ s seen inflows of nearly $ 50 million in 18 months . so these questions of course pique my interest . More importantly , i find myself wondering if esg investing is really helping society or if it ’ s simply a giant marketing scam that has been “ weaponized by phony social justice warriors ” ( or behemoth financial institutions charging higher fees ). that ’ s what elon Musk said about the space when his electric car manufacturer , tesla , was kicked out of the s & p 500 esg index . to answer these questions , i looked to larry swedroe and samuel adams , whose new book , Your Essential Guide to Sustainable Investing ( 2022 ), does a fantastic job of collating multiple studies into one comprehensive manual . swedroe and adams review academic research to study esg funds ’ claims of higher returns , but also esg ’ s overall impact on society . they address the question : is sustainable investing working to make our world better ? the results are not what you might expect . here ’ s what the authors reveal :
• Despite popular claims that esg returns are comparable to , if not better than , non-esg returns , swedroe and adams argue that sustainable investment strategies should expect lower returns over the long term , even while they initially generate higher returns . the reason is quite simple : short-term returns are driven by high investor demand , which elevates companies ’ stock prices while lowering their cost of capital . in turn , one can expect lower longer term returns from companies with higher p / e ratios .
• conversely , companies that are not sustainability minded will need to reward investors with a risk premium , since their systemic risk is higher . For example , their risk of corporate scandal due to poor governance ( think Wells Fargo ), or a major oil spill ( Bp ), will be greater . their higher returns , like those of the sin stocks of the past , will be required for an investor to purchase their shares , all else being equal . By
58 | financial advisor magazine | july / august 2022 www . fa-mag . com