The Environmental, Social, and Governance rating has become a trending topic of discussion in the investment community since its invention and adoption in the past few years. In fact, over the past few years investing through this ethical lens has become quite popular, with sustainable investments totaling $35.3 trillion. Investing sustainably accounts for 36% of total assets under management according to the Global Sustainable Investment Alliance (or GSIA). Even within the Invstr community, a poll a couple of years ago revealed that 70% of the community is committed to ESG. Despite this stability and growth, the ESG is being challenged by the situation in Ukraine as what was sustainable is now overlapping with what is political. What do I mean by this? Well Russia has always been a major energy provider. In fact, Industry researchers at Morningstar Inc. estimate that 14% of sustainable funds globally held Russian assets right before the war.
This poses quite the challenge for ESG based portfolios across wall street as a debate occurs on what lines ESG ratings should be drawn. Many ESG investors argue the term is widely misunderstood and that it’s merely a screening tool to protect investments from more risk. Many in this boat have said that “Sustainable and ESG funds aren’t the same as ethical funds” and that ESG funds can buy everything from makers of conventional weapons to producers of fossil fuels. The empirics check out here with BlackRock Inc.’s $23.7 billion iShares ESG Aware MSCI USA fund (the largest ESG fund in the world) holding shares of companies like Raytheon and Exxon Mobil. What do you think about ESG ratings? Are you still interested in keeping up with it in your portfolio? Or has your opinion changed?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.