To ESG or Not To ESG

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Environmental, Social, and Governance (ESG) are three words—or three letters—that have become a hot topic in the investment world over the last couple of decades. The origins of its first use vary depending on your online source, but most point to the term being coined in the mid-2000s by a United Nations report.

That said, according to MSCI, the first iterations of ESG investing began even before the three-letter acronym existed. Back in the 1960s, socially responsible investing started with “investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.”

But what is ESG investing in 2023? Why is it a controversial topic? And what should wealth management firms do about it? This article sets to find out.

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ESG investing today

The three categories: Environmental, Social, and Governance, exist as non-financial factors that are used to analyze investment decisions. In addition to highlighting potential risks or growth opportunities of an investment, ESG factors are commonly used by socially conscious investors to see the impact a company makes on the respective categories.

What began as a rating system has turned into its own industry—and it’s growing. According to Pwc’s Asset and Wealth Management Revolution Report 2022, asset managers around the world can expect to increase their ESG-related assets under management (AUM) from US$18.4tn in 2021 to US$33.9tn by 2026.

What’s causing the growth? Investor demand. The report above also states that 8 out of 10 US investors plan to increase their allocations to ESG products in the next two years.

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What makes ESG investing controversial

Given the increasing demand, ESG investing seems to be an unstoppable force, but it has had some backlash in recent years. Across the US, several states are trying to ban state assets from being invested in ESG-driven initiatives. Why?

For some, measuring an investment based on Environment, Social, or Governance impact might feel too “woke” or politically driven. We’re not saying it is, but in states where ESG factors aren’t a priority, ignoring the ratings overall can be a firm public stance on one’s views.

For others, they may feel a disconnect between what ESG measures versus a company’s overall impact. A notable case is Elon Musk and Tesla. In 2022, the electric car manufacturer lost its standing on the S&P 500 index dedicated to ESG issues. Musk criticized the evaluation methodologies, calling it a “scam.” The company’s views on ESG seemed to be decided even before the change though, given the foreword in its 2021 Impact Report.

Of course, despite the critics, trends show ESG investing continuing to grow. So where does that leave wealth professionals? Should you lean into the obvious growth? Or will your decision be made for you depending on where you live and who your clients are?

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ESG and wealth professionals: knowledge is power

You know your clients best, so you know what type of investments will interest them. But all in all, ESG investing seems like it’s here to stay.

Love it or hate it, you should embrace becoming knowledgeable on the topic so long as investors seem to demand it. You don’t necessarily have to use it, but you should be prepared if you need to.

We’re already seeing a shift to a more holistic outlook on wealth management. A truly holistic experience means having a full understanding of your client, including their financial goals, life goals, and impact goals.

Being armed with ESG metrics, and data means you can insert your knowledge and expertise when appropriate and provide the best service for your clients.

CapIntel is proud to present trusted ESG data, provided in collaboration with MSCI ESG Research, on our platform to best prepare our users with the information they may need to build trust and confidence with clients. Learn more here.

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