ESG investing is here to stay — as long it pays off

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By Steve Dinnen

Is ESG real? Very much so. Is it here to stay? Very much so.

Despite some naysaying, mainly from politicians (noted below), “environmental, social and governance” criteria can be a useful tool. Regular investors can’t seem to get enough of them and are pouring their money into companies, exchange-traded funds and mutual funds that abide by ESG guidelines. The consulting firm PwC forecasts that by 2026, total investment in American ESG funds will top $10.5 trillion, double its current total.

It’s useful to think of ESG as a successor to CSR — corporate social responsibility — though its scope is much wider. While CSR focuses on companies that strive to behave in an ethical manner, ESG looks at the criteria used to measure a company’s sustainability. And shouldn’t we all want our investments to be made in a business that can sustain itself over the long term?

Matt Davis, the director of tax credit investments at Monarch Private Capital, said “almost every company is paying attention to ESG.”

And why wouldn’t they? Why wouldn’t Coca-Cola be concerned about the amount and quality of the water it uses? Why wouldn’t an energy company be concerned about flaring off natural gas that it might be able to sell to consumers? We’re consuming more and more energy, so why not look into renewable sources rather than continue to drain finite sources? If you operate your business in a responsible, ethical manner, doesn’t that give you a better shot at sustaining it? And shouldn’t you communicate this to your owners and competitors?

Since Wall Street likes to keep score, “there are direct, measurable ESG attributes that we can use to our advantage,” Davis said.

Bloomberg, for example, has a proprietary scoring system that investors can use to assess opportunities from an ESG perspective. The highest scores don’t necessarily go to companies that are “green” non-polluters. The steel fabricator Worthington Industries, for example, currently tops the rankings from Investor’s Business Daily, while the truckline J.B. Hunt ranks second. No Iowa firms are among the top 100, although Moline-based Deere & Co. ranks 60th.

Several prominent mutual funds and ETFs also focus on ESG criteria (including Vanguard ESG U.S. Stock ETF, ESGV, and Nuveen ESG Dividend ETF NUDV). Some are beating the market, and some are not — just like the rest of the investing world.

So as with everything else on Wall Street, the proof of ESG is in the pudding. “Without performance, it’s a non-starter,” Davis said. But “it’s not going away.”

Politicians squabble over ESG rules

ESG has its detractors. Congress tried to ban 401(k) and other workplace retirement plans from offering ESG funds, but President Biden vetoed that plan.

Here in Iowa, Gov. Kim Reynolds went the other direction, spearheading a drive to adopt anti-ESG rules. She called environmental, social and governance principles “financially reckless” and legally suspect. Iowa joined 17 other states in adopting anti-ESG rules.

Politicians have waded into the investment arena before. BDS — boycott, divestment and sanctions — is not an investment tool but rather an effort to put pressure on American companies that do business with the Israeli government, which some people believe is mistreating Palestinians. Iowa and other states have banned their governments from doing business with firms that support BDS.

The U.S. Department of Labor recently eased the path for fiduciaries that consider ESG factors while managing ERISA-regulated retirement plans. But the broader investing industry still awaits a final rule from the U.S. Securities and Exchange Commission about requirements for ESG disclosure.

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