Photo courtesy of Blue Bear Capital Partners.
ESG Investing is Good for the Bottom Line
Environmental, social, and governance (ESG) principles encourage investors to consider factors such as carbon emissions, land use, labor management, board diversity, and financial transparency—in addition to financial factors—in investment decisions. Research shows that ESG investments are less volatile and less risky and therefore more likely to perform better over the standard investment time horizon.
The Rockefeller Brothers Fund proactively seeks to integrate ESG criteria into investment processes as part of our Mission-Aligned Investing strategy, which expects all investments to meet market-rate return and risk attributes.
As concern over social and environmental issues like climate change and racial equity has increased, ESG investments have steadily grown over the last five years and are projected to account for one-fifth of all assets under management, or an estimated $33.9 trillion, by 2026. The increase in ESG investing, alongside deepening social polarization, has led to increased criticism from groups on both sides of the political spectrum. Conservative elected officials have led the charge against ESG investing as a part of an attack on more stringent labor and environmental standards, while progressive voices argue that ESG standards are often too weak and allow some companies to exaggerate their environmental impact, a phenomenon known as “greenwashing.”
Legitimate concerns about the structuring, categorization, and evaluation of ESG investments may exist, and there is not currently a cohesive or uniformly adopted set of metrics that allow investors to evaluate an ESG investment. But restricting the freedom of investors to choose where and how they invest is a poor economic strategy.
When states ban, restrict, or legally bind investors from considering factors like carbon emissions, fossil fuel divestment, internal governance structures, board diversity, and others, they block investors from taking into account systemic risks posed by climate change, regulatory shifts, and evolving public attitudes. This violates investors’ fiduciary duty of achieving the best investment returns possible. To put this in context, the economic impact of climate change is estimated at $178 trillion over the next 50 years, posing significant risks to both investment portfolios and business operations. Legislation barring the consideration of environmental factors could increase the economic impact of climate change by reducing funds for sustainable innovation, stranding assets in outdated fossil fuel infrastructure, and accelerating carbon emissions that are warming the planet. That is neither responsible business nor investment practice.
Ignoring the systemic risks posed by factors like climate change and inequity won’t limit their ultimate costs. Despite the current backlash against ESG investing, the Fund remains steadfast in its commitment to increasingly align its endowment with its mission and proactively assess the impact of its investments. As the field of ESG investing continues to develop and grow, so will business practices that are sustainable, equitable, and good for the bottom line.