Myths about Responsible Investing can deter us from taking into account Environmental, Social and Governance (ESG) considerations in our investment decisions and make a positive impact on society.
Myth 1
Doing good comes at a cost
Reality
Focusing on ESG factors can help reduce exposure to long-term risks
Research suggests that returns from sustainable investing are comparable to the market over the long-term 1. Companies that have sound policies that consider their impact on the environment and society tend to have more sustainable business practices and less exposure to damaging incidents. This makes their earnings less volatile.
1 MSCI, “Foundations of ESG Investing”, https://www.msci.com/documents/10199/03d6faef-2394-44e9-a119- 4ca130909226
You can enjoy comparable returns but with lower volatility over the long-term through Responsible Investing.
Myth 2
Responsible Investing is a fad
Reality
It’s more mainstream than you think
As investors acknowledge that environment and climate related risks are long-term global challenges, Responsible Investing has become more mainstream. As of 31 March 2020, the Principles of Responsible Investing, the world’s leading proponent of responsible investment, had 3,038 signatories, representing USD 103.4 trn of assets.
You can make a positive impact through your investments by selecting managers who actively integrate ESG considerations.
Myth 3
Responsible Investing means you don’t invest in companies with poor ESG track records
Reality
There are many approaches to Responsible Investing
Different asset managers have different approaches to Responsible Investing. Some choose to exclude certain companies based on their business activities. Others choose to integrate material ESG factors into their investment decisions and to engage with investee companies. The latter approach hopes to influence changes in business strategy and activities, which may add value to their investments over time.
There are multiple ways to integrate ESG considerations into an investment process. Pick funds with investment objectives that align with your core beliefs.
Myth 4
Responsible Investing may give me too much, or little, exposure to certain sectors
Reality
Managers may or may not limit sector exposures
Some investors worry that Responsible Investing may result in unintended consequences. This may include for example, higher exposure to the technology sector (which produces relatively lower levels of carbon emissions compared to other sectors such as mining or oil exploration).
In reality, managers may or may not limit sector exposures to manage shorter term deviations from market performance.
Review fund disclosures to understand the potential deviations or tilts which your investment may be exposed to.
Myth 5
Responsible Investing is less effective in the Emerging Markets due to lower ESG ratings
Reality
Changes in a company’s behaviour towards ESG considerations matter more
Developed markets, especially Europe, may lead in terms of the quality of information companies disclose on ESG metrics as well as in terms of having higher ESG ratings.
However, it is not the ESG rating that matters to the markets. It is the change in a company’s behaviour that becomes recognised by the market that matters. Investors cannot rely simply on ESG ratings – very often, the ESG ratings of different providers may not agree with each other!
Don’t shy away from Responsible Investing in Asia and the Emerging Markets. Many policymakers in these countries are implementing frameworks to improve ESG reporting in their markets which can in turn influence company behaviour for the better.
