Back in May after AAII Journal editor Charles Rotblut and I interviewed Larry Swedroe about environmental, social and governance (ESG) investing, publisher Harriman House reached out to us with copies of “The ESG Investing Handbook,” edited by Becky O’Connor. The book features interviews with a variety of U.K.-based asset managers and provides an overview of the global ESG investing landscape.
The book covers investing for the three different components of ESG, the performance of ESG investments, different ESG strategies, regulations and ratings, grassroots and investor engagement and what the future holds for ESG investors.
While there are a variety of opinions shared in the book that sometimes contradict each other, the introduction begins with an air of urgency and uncertainty, saying that “the global crisis is now so critical that only positive impact investments focused on solutions will do. According to this view, we don’t have time to engage with the old-world fossil fuel companies and they must be left behind completely. But in building an approach that seeks to be ‘good only,’ we may also be in danger of creating another fallacy—that positive impact is 100% perfect.”
In one interview, the Baillie Gifford Global Stewardship team discusses how “it is tempting to only invest in companies and funds that already have a positive impact, but the world doesn’t work that way.” Of course, we know that investments are not all green or all brown, and ESG investments’ ratings can change throughout their existence. But personally, I still struggle with the idea that I should be investing in a company or fund because of the promise of more sustainability in the future. It’s like getting into a relationship with someone who says, “Give me like five years to get my shit together.” That doesn’t sound like a good use of my time or money!
My favorite parts of the book are the helpful lists of sustainable companies. I’ll be revisiting these investing ideas when I add more money to my brokerage account in the new year! Some companies include Beyond Meat Inc. (BYND) for reducing its land use and carbon dioxide emissions, HP Inc. (HPQ) for increasingly using recycled plastic in production and Enphase Energy Inc. (ENPH) for its development of renewable energy products. Though I won’t be investing in individual stocks, these examples give me some direction on what funds to look for.
The figure below shows the sustainable development goals that were presented by the United Nations (U.N.) in 2017. The different values show “which of the goals have attracted the most investment—and which goals asset managers have struggled to meet.”
This provides more ideas for sustainable investments, but also shows where we need to do better or are otherwise lacking.
The book also provides some color on the fashion industry and its horrors. Not only do many of the top brands treat their employees like modern-day slaves—certainly not passing the social element of ESG—I learned that it takes “10,000 litres of water to make a pair of jeans” and “two billion people in the world live somewhere with inadequate water supply. The fashion industry relies on 98 million tonnes of non-renewable resources every year.” This is an egregious use of natural resources that are required for humanity to survive, and even more reason to shop second hand whenever possible.
Thankfully, “Regulations elsewhere are beginning to take root. In New York, the home of Sex and the City and Manolo Blahnik shoes, the Fashion Sustainability and Social Accountability Act was presented in January 2022, which could make New York ‘the first state in the country to pass legislation that will effectively hold the biggest brands in fashion to account for their role in climate change.’” When I looked up the status of this act, I noticed that it had yet to be passed. Legislation like this is vital, but the government works so slowly that by the time this act becomes a law, it may already be too late to reverse the damage. Maybe Carrie Bradshaw could pull some strings? 😏
I found the most interesting chapter to be the one about governance, the G in ESG. Prior to reading, I didn’t have much information on what governance really meant for a company. Essentially, governance is what connects the E and S: “How well a company meets environmental and social targets will ultimately come down to the strength of the governance—the ‘glue’ between a business and its stakeholders.”
When asked about how to know when good governance is working, Federated Hermes Ltd. chief risk and compliance officer Keith Davies says, “Ultimately, the key to demonstrating good governance is the success of the firm and its ability to deliver an appropriate strategy effectively, safely and without major issues or events. This includes showing progress on key ESG objectives—with clear and consistent reporting against target milestones.” Governance grounds the ESG strategy in evidence, measurables and actual impact to hold companies accountable for their actions and audit their sustainable progress.
If you are interested in investing sustainably, this book provides a great place to start with your research. I will definitely be returning to it for guidance and inspiration whenever I feel frustrated about my lack of ESG investing options.
Happy holidays, I’ll check in with you in the new year!
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