ESG Stocks: What Is ESG And Do ESG Stocks Outperform The Rest? (2024)

FAQs

ESG Stocks: What Is ESG And Do ESG Stocks Outperform The Rest? ›

ESG stands for Environmental, Social, Governance. These companies make efforts to operate sustainably, contribute positively to their communities and ensure they act fairly when it comes to their employees and promoting diversity. They also implement transparency about their leadership and how the company is run.

The existing literature on ESG outperformance is quite compelling: “Deutsche Bank performed an analysis of more than 2,000 empirical studies dating back to the 1970s and found that about 90% of the studies suggested that ESG investing provides superior returns to passive investing” (quote via Forbes)

Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly. Many brokerage firms offer investment products that employ ESG principles.

ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.

Critics of ESG — such as a group of Republican states that banned Blackrock and other “ESG friendly” asset managers from their state pension plans — argue that considering environmental and social factors violates the fiduciary duty that asset managers have towards their clients.

Due to the changes in the discount rates, the relative prices of highly rated ESG stocks will increase and the relative prices of low ESG stocks will fall. Consequently, during the adjustment period the highly rated ESG stocks will outperform the low ESG stocks.

Valuation channel: High ESG-rated companies have shown lower systematic risk exposure, evidenced by less volatile earnings and less systematic volatility. Compared to low ESG-rated companies, they also experienced lower betas and lower costs of capital.

The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

IS IT JUST MILLENNIALS DOING IT? No, the vast majority of money in ESG investments comes from huge investors like pension funds, insurance companies, endowments at universities and foundations and other big institutional investors.

What is ESG in one word? ›

ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in.

Successful companies are implementing ESG strategies that increase financial, societal, and environmental impact as well as ensure long-term competitiveness.

ESG stands for Environmental, Social, and Governance. It's a way to measure how companies care about the planet, treat people, and make decisions. It helps us understand if a company is responsible does good things.

Why have some Republican officials criticized ESG investing? Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.

One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.

Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. After sweeping through battles in statehouses across the country, the war against ESG investing is heating up in Congress.

However, the table below shows that we also saw an inverse relationship between ESG score and monthly return: The Better ESG portfolio had a monthly return of 0.89%, compared with 1.06% from the Worse ESG portfolio.

A lot of their underperformance is thanks to missing on just a handful of tech stocks, according to a report from Morningstar. Last year, 82 out of Morningstar's 146 sustainability indexes underperformed their non-ESG equivalents, making 2023 the second worst performing year on record, after 2022.

Key findings

Globally, ESG leaders earned an average annual return of 12.9 percent, compared to an average 8.6 percent annual return earned by laggard companies. This represents an approximately 50 percent premium in terms of relative performance by top-rated ESG companies.

Researchers found the annual underperformance of ESG funds was about 0.7 percentage points after balancing the sector weights between the ESG and non-ESG funds.