The Environmental, Social, and Governance (ESG) investing journey has not followed a freshly paved path, rather it has been a trek through the woods for trailblazers on an unpaved, and oftentimes, nonexistent road most of the way.
If we reflect on the evolution of ESG investing in the US, as recently as five or six years ago, few people could define what the initials ESG stood for.
Let’s take a step back and take a look at where ESG first began. Did you know the acronym was coined in 2004 when Kofi Annan, the Secretary-General of the United Nations at the time, started an initiative to integrate environmental, social and governance issues into capital markets? It was called Who Cares Wins (WCW) and was backed by 23 financial institutions, representing over $6tn in assets. The idea of WCW was that companies with stronger ESG practices would materially increase in shareholder value over the long term. While many think about ESG evolving out of socially responsible investing, focused on values or morals alone, the original concept of ESG investing was actually quite different, focused on enhancing shareholder value. It is about finding companies who are more likely to succeed in the future due to strong operational quality, limited reputational risks and innovative businesses, positioning themselves to benefit from structural trends.
This is where the dialogue should get back to: about using environmental, social and governance information to identify companies who are mitigating today’s risks and capitalizing on tomorrow’s opportunities.
Investors may wonder how ESG data can really add to shareholder value. Here are a few thoughts:
The confusion about ESG and ultimately the ability to politicize the concept, comes down to the fact that we are labeling apples, oranges and bananas all with the ESG acronym, ignoring fundamental differences in investment approaches and objectives. While all may leverage ESG data, different approaches use the data very differently to achieve varying financial and non-financial objectives. Some investment strategies may be using ESG data to invest alongside certain values, limiting the investment universe, whereas others may be leveraging the information to invest in one particular theme. Investors may also use the information to exclude companies in certain industries, whereas others are using the data to conduct a more forward-looking analysis of potential investee companies. The latter is really what ESG is about at its core: doing good diligence and using material information to mitigate risks and capitalize on opportunities. This is something all investors have the potential to benefit from, regardless of political orientation. Of course, this information can be used to invest alongside certain values, but it doesn’t have to be all or nothing, this data can have various uses.
In the end, ESG data allows for more informed investors, and just like any other industry, we must evolve to remain competitive and relevant in a changing global landscape.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Candriam Luxembourg S.C.A., is an affiliate of New York Life Investments and serves as the advisor to the MainStay Candriam Funds. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.