An Introduction To ESG Investing And It’s Educational Applications
Almost every global issue is in some way being exacerbated or directly caused by anthropogenic climate change. The many global supply-chains that we have relied upon for economic development, innovation, and the pursuit of a higher quality of life have failed us due to short term resource management . But, there’s a chance that the very economic systems that have led us to this point may just bring us to a more balanced global ecosystem. In the first half of 2020, funds that focused on sustainable investing brought in $20.9 billion dollars, roughly matching the entire haul from 2019 according to The Wall Street Journal. This is only one monetary marker, within an entire class, which points towards a more holistic and sustainable approach to investing.
Investors are realizing that the future is so severely uncertain. Managing risk is paramount, and using a scale to both quantify and ascertain an investment's potential risk in an economic crisis has become standard. ESG (environmental, social, and governance) has become the primary factor when determining a company's strengths and vulnerabilities. And now, as humanity finds itself in arguably the most dangerous crisis since the World Wars, investors have turned to impact investing as both the only and necessary path to follow.
It’s fundamental to any investor's gameplan to ask basic questions about a company's business. Here are three fundamental questions about ESG’s place in investing and our society.
Is it profitable?
The short answer: yes. After closing the chapter on ⅕ of this century, and whilst entering a new age characterized by COVID-19, the need for sustainability within every corner of society is obvious. The market is demanding resilient business models. According to The Guardian, a ten year comparison of traditional funds and sustainability-focused funds showed 6.3% and 6.9% of growth respectively. During quarantine this trend has continued . “In all but one category considered in the study, sustainable funds outperformed, with an average excess returns in Q12020 ranging between .09% and 1.83% across categories” reported by Morningstar, a financial research company.
What are the industry ESG benchmarks?
This is where both investor goals, values, and research come into play. The most popular ESG funds such as Vanguard's VFTAX, are questionably molded by America’s biggest technology companies such as Apple and Facebook. This may make you wonder if analysts are greenwashing their benchmarking standards, or if the standards themselves are compromised by mediocre goals. There is no clear answer. Just as Morningstar or Yahoo Finance will come out with different market predictions, there will be varying standards to judge a company based on an analyst's own criteria. This is where finding your personal balance between values and profits comes into play, and where careful research is needed.
What is the educational and societal potential of ESG investing?
For years the economic narrative has consisted primarily of growth, profit, and the genius of corporate capitalism. Now, we have reached a point where those “truths” are being tested. Is growth either necessary or good for society? How are we measuring growth? Can we change this narrative in the investment industry, and also in our school classrooms? It is now critical to not only judge our investments from an ESG lens, but also every aspect of our educational system. Everything is connected, and the story we teach our youngest generation about this Earth, it’s systems, and our place within its ecosystems may just determine the future of our species. The most obvious place for the integration of ESG investing in our school curriculum is within the social studies and economics classroom. A piece from The Journal of Sustainability does a lovely job of outlining this alternate story. to The outdated story of supply, demand, and the endless pursuit of growth must be discontinued, just as investing in fossil fuels should cease to exist.
The markets demand sustainability just as the earth does. ESG investing offers enormous promise. It allows us to think about our investments as a tool for societal change and financial security. Changing the traditional economics narrative in our classrooms may just lead us to a more sustainable and equitable future.