Environmental, Social and Governance (ESG) investments have gained significant popularity in recent years. But hype and misleading marketing means every claim demands careful scrutiny.
Investors are increasingly considering whether ESG solutions should form part of their portfolio, drawn by the prospect of having a positive impact on society and the environment. But while these messages are compelling, it is crucial to separate fact from fiction.
About the ESG fact check
Given a backdrop of overstated marketing claims, Lumin have carefully assessed seven commonly cited claims about ESG investing through an in-depth research study designed to help investors understand the full picture of ESG investing. Below, we have summarised the three most significant and our findings:
ESG ratings primarily focus on environmental factors
Many financial institutions promote the potential for strong environmental im-pact through ESG investments. However, contrary to popular belief, Lumin’s analysis reveals that the environmental component is, in most cases, the least heavily weighted dimension.
For example, in the UK equity market represented by the FTSE 100, MSCI ESG ratings assign a weighting of around 20% to environmental factors. Meanwhile the social and governance dimensions each account for roughly 40%. This raises the question: are investors truly contributing to the environment as much as they are led to believe?
Investors are making a positive contribution to society
Whilst there exists a wide range of academic literature pointing to the positive environmental impact of ESG from a theoretical lens, for example by influencing corporate behaviour, there is still limited evidence on how strong these effects are in practice. Current research indicates that any meaningful impact is achieved through voting and engagement.
At present, the most balanced answer to the question of whether investing in an ESG equity ETF delivers a positive impact would be “in some cases, perhaps to a limited extent.” In turn, investors seeking out ESG solutions should proceed with caution when being sold ESG investment products, as the promise that investors are positively contributing to society is not always substantiated by transparent, measurable, and consistent impact outcomes.
ESG equity ETFs achieve higher returns
There are common claims circulating that ESG investments achieve higher returns than traditional investments. Our study, however, revealed that whilst it is true that ESG equity ETFs can generate excess returns, it is equally true that they can result in negative performance deviations.
The scale of these differences largely depends on the index selected and the methodology applied. For example, the study found that as efforts to improve ESG characteristics increase, the potential for greater deviation also rises. Investors should therefore be cautious of bold claims such as “at least equivalent returns” when investing in ESG products, are a careful product-specific assessment is crucial.
[i] For tailored and transparent advice on ESG investing and its potential impact on your portfolio, contact one of our consultants on 03300 564 446 or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
