ESG Landscape and What Lies Ahead

November 6, 2023

Understanding the Heart of ESG: Environmental, Social, and Governance Factors Explained

Whether or not you’ve seen this year’s ESG-related headlines, the term can be one that is hard to understand and may be associated with various assumptions. BSW is attempting to cut through the noise and clarify what ESG is and is not. ESG is a framework, applied to an investment strategy, that includes material Environmental, Social, and Governance factors when making investment decisions. Here’s an example: when considering the G (governance) of ESG, there is a belief that it is in the investor’s best interest to ensure a company’s board is comprised of industry experts and that there is sufficient board oversight of executive compensation. If this is not the case, the thought is there may be potential risks when investing in the company. The value proposition of ESG investing is realized by aligning the short-term intentions of investors with the long-term outlook of society while simultaneously mitigating risk and realizing opportunities.

Challenges in the ESG Landscape: Transparency and Greenwashing

To fully understand the ESG landscape, it is important to be aware of the challenges caused by a lack of transparency and greenwashing. As of 2020, there are over $35 trillion in managed assets that claim to have an ESG overlay. This constitutes 30%-to-35% of global managed assets. At first glance, this should be something to celebrate! However, we believe the numbers are deceiving in large part due to a lack of transparency around what qualifies as ESG. For example, large fund companies have an innate advantage (a household name, marketing capabilities etc.) over boutique firms and tend to draw the greatest inflows of capital. However, their ESG funds frequently are composed of the benchmark (e.g., S&P 500) less a small handful of companies. A fund that closely tracks the benchmark and excludes only a handful of obvious names likely gives no significant ESG benefit. Investing in such funds is, in our opinion, more of a superficial, feel-good way of pursuing an ESG strategy where investors fall victim to greenwashing.

Greenwashing, or impact washing, is when fund managers overstate an investment’s positive environmental or societal impact. Why does greenwashing / impact washing occur? The most basic answer, unfortunately, is because it is easy, and it pays. The people who suffer are the ESG players and your everyday investor. Generally speaking, investors gravitate towards simplicity. Knowing this, some fund companies discovered that simply adding an ESG label and forgoing substantial ESG analysis can be sufficient to attract investors to their fund. The broader impact of this is ESG’s reputation takes a hit as being nothing more than a marketing campaign.

BSW’s ESG Knowledge: Navigating Complexity, Providing Clarity

The good news for BSW clients is that we are aware of these challenges and have industry relationships that we believe allow us to better navigate the ESG world. When we choose ESG strategies, we typically evaluate the manager, their process, their commitment to ESG, the team they’ve put in place and their fees. If you want a more detailed refresher on our process, I’d encourage you to revisit a previous BSW blog post Here.

Looking ahead, some ESG themes we foresee impacting investors are: opportunities for impact in the bond world, the global adaptation to a warmer planet and the implications of global climate legislation.

  •       With fixed income yields at historically attractive entry points, we believe there is a real opportunity to add green, social, or sustainable bonds to your portfolio. Green bonds may fund projects focusing on renewable energy solutions, social bonds tend to focus on positive community impact, and sustainable bonds are generally a mix of green and social.
  •       2023 is on track to be the hottest year on record in our planet’s history. We can’t ignore the reality of a warming planet, which comes with risks to the global economy. These risks may have implications for investors and make the case for the materiality of ESG factors. Think about the following risks posed by a hotter planet: increased frequency and severity of wildfires; greater unpredictability for crop and livestock management with implications for food supply and prices; increased demand for power to cool our homes. These examples are a few of many that have the ability to threaten global economic growth. We believe an opportunity for investors lies in allocating funds toward solutions that have the potential to become an essential part of climate risk management.
  •       Global climate legislation can serve as an indicator of where to direct capital. Paying attention to policies that are put in place, like the Inflation Reduction Act and the European Union’s Green Deal Industrial Plan, can signal where to look for potential investment opportunities.

ESG Beyond Buzzwords: A Fundamental Shift in Investment Paradigm

Despite the varying perceptions, we believe ESG is here to stay. No matter how you spin it, environmental, social, and governance factors can be material to investment decisions. In fact, increasingly more companies are making decisions based on ESG factors. Here are two facts to consider: 1) In 2022, 69% of S&P 500 companies tied executive compensation to ESG goals, an increase from 60% in 2021; 2) Nasdaq reported around 65% of Russell 3000 firms are discussing ESG factors on their quarterly calls. If companies are accounting for ESG factors, shouldn’t we as investors?





This blog is created and authored by BSW Wealth Partners, Inc., a Public Benefit Corporation (“BSW”) and is published and provided for informational purposes only.  The opinions expressed in the blog are our opinions and should not be regarded as a description of services provided by BSW or considered investment, legal or accounting advice.  Certain information sited is from third-party sources and while we believe the information to be accurate and true to the best of our knowledge, we cannot guarantee its accuracy as there may be certain unknown omissions, errors or mistakes.  Use of third-party information, including links, is in no way an endorsement by BSW.  The views reflected in the blog are subject to change at any time without notice. Nothing on this blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product or investment strategy is suitable for any specific person.  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BSW), or any non-investment related content, made reference to directly or indirectly in this blog post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Not all BSW clients will have the same experience within their portfolio(s) and certain topics discussed in this blog may not apply to all clients or investors.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BSW.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  BSW is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of BSW’s current written disclosure statement discussing our advisory services and fees is available upon request.
It is important to understand that utilizing ESG-specific investments and investments that BSW perceives to have an intentional or measurable impact, does not guarantee that investment selections will align with specific sustainable values that you may have, but will instead be invested in accordance with BSW’s criteria for investment selection. ESG scores and ratings may differ from one investment to another. It is important to note that how a firm and/or portfolio manager analyzes and identifies ESG factors may not reflect how another firm and/or manager does respective research.
Further, the underlying holdings of pooled ESG investment vehicles may or may not offer the same level or scope of ESG information as other companies and, therefore, data may not be consistent across the board. As a result, some investments may not capture sustainable concepts with 100% accuracy. Therefore, we may rely on portfolio or fund managers to establish their own system of ranking and sustainable factors in coordination with their mandate.
Utilizing ESG-specific investments does not guarantee a certain level of performance. The investment universe of ESG-related investment vehicles is by nature narrower in scope and therefore your investment options may be limited. Further, by narrowing the scope of investment options you may or may not be missing out on an opportunity or sector that could contribute to overall performance. ESG-mandated investments may have a higher expense ratio than traditionally managed investment vehicles.