Is the trend toward ESG-type investing a fad that will go away or a Trojan horse undermining the capitalist system and hurting investors, companies, and the economy?
According to PwC, it is estimated that globally about US$18-trillion is invested in firms that follow ESG principles. In the United States, in particular, 2021 was a very good year for ESG funds as their assets under management increased by 35 per cent over the previous year. ETFs following these environmental, social, and governance principles have been the fastest growing segment in the ETF space in the past few years.
Pushing corporations and fund managers toward ESG, ESG ratings and other criteria may destroy shareholder value in light of the upfront costs of many ESG strategies, such as reporting, legal, staff training and compliance costs, as well as the new regulatory requirements that introduce additional costs to the ESG fund management process.of ESG ratings is that investors are not able to assess the ESG risk of a company by themselves and so we need ESG rating agencies.
While research shows that ESG performance does not affect cash flows, ESG ratings do improve the quality and quantity of information available about the company. This reduces the risk that is associated with investing in the specific company. But if this is the case, this risk is diversifiable. Namely, it will not make a difference in a well-diversified portfolio and hence will have no impact on valuation. Indeed, there is only weak evidence that markets incorporate ESG into pricing.
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