As investors increasingly value ethical, planet-conscious behavior in the companies to which they direct their funds, environmental, social, and governance (ESG) investing has gained a foothold despite some obstacles, business news outlet Finance Magnates reports.
Climate change, human rights, labor policies, diversity, and corporate corruption are issues that investors have on their allocation radar. Knowing where companies stand helps investors find compatible recipients of their funds. And companies that focus on ESG concerns may be poised for long-term sustainability.
But some logistical hitches exist, which can make ESG investing a bit difficult to navigate. For one, there isn’t a global standard for analyzing and comparing companies’ ESG strategies. As a result, investors may not be able to determine if a company is misrepresenting its practices. Some have misled investors with exaggerated claims. Tied into this reporting issue is the lack of transparency about ESG data, which isn’t required by any entity to be published. Advances in data analysis technology, though, may help to better ascertain a company’s position, Finance Magnates claims.
Investors may also find that companies that prioritize ESG concerns have higher upfront costs, which could impact their short-term financial performance. And investment options may be limited in certain sectors, decreasing the chance to diversify portfolios and promote ESG concerns simultaneously.
Despite the obstacles, record inflows to ESG funds in 2020 reached $1.7 trillion, according to an analysis by the capital market company, MSCI. Proponents say they believe ESG investing promotes ethical business practices and makes for robust financial returns, according to Finance Magnates.