What People Mean When They Say ESG Is “Underperforming”

Published on:
by Eric Burdon
Graphic of gradual plant leaf growth, signifies green growth

Every action taken by a movement is met with an equal amount of opposition. In the ESG world, there has been a rise in the number of supporters and critics worldwide. There have been critics, as well as investors and companies (and countries) eager to participate in ESG initiatives.

One of the loudest is in America, where some are dead set on banning ESG. This is on top of having many treasurers, attorneys general, and other elected officials place restrictions on pension funds, divest from companies that support the movement, or show hostility to any company that shows a sign of branding an investment strategy as "green."

The main argument for why they are doing this is that mandating or giving investors the option to adopt ESG values is an added risk with no or smaller returns. They argue that mining and energy production right now are excellent providers and have funded pensions for decades and for millions of people.

The smaller returns are most important in this argument. With a downturn in ESG performance during 2022, people felt justified in calling the movement “woke” or a scam. Some might even feel validated by this turn of events.

But these individuals are terribly misguided. The fact that ESG underperformed last year says more about what these individuals are like and how they think than it does about what ESG actually is. Here is what it reveals.

It Means Narrow Thinking

2022 was one of the biggest blows to ESG to date. Some rich guy called it a scam, the war in Ukraine happened, and COP27 was swarming with fossil fuel lobbyists. Progress was very slow in some of the major areas, and as a result, it makes sense that people would be losing confidence in ESG at this point.

However, the people who say it's underperforming right now are people who are only thinking about the here and now. It's critical to remember that long-term investment strategies, such as establishing a pension fund, should be considered not just a year from now, but 10, 20, 30, or more.

What’s worse is that the reactions and actions that people take now will have ripple effects in later years. It’s why solid investment advice is to invest as soon as you possibly can. Divesting from companies that promote ESG in various ways right now is a premature action that will cost more down the road.

It Means They Have No Clue What ESG Is

That goes without saying when the only argument that critics have is that they prefer fossil fuels over green energy. We know ESG is a lot more than just the trees. But from an investing standpoint, these individuals are even more clueless.

In terms of performance, ESG-based indexes are set to outpace those that aren’t in the long term. What’s staggering is that even if you remove the clean energy funds from there, they will still outperform the index and broad peer group on the basis of stylistic similarities.

The pushback from this is purely ideological and only exists because one part of this movement focuses on the environment. Granted, it’s a big point of contention for Americans, but an easy counter to this argument is as simple as asking the person, “So you don’t care about making more money then?”

It Means They Like Being On A Sinking Ship

The critics of ESG prefer to stick to their ideals rather than change and adapt to a situation. Not only is this a tough pill to swallow with anything in life, but investing is also in the same vein. A diverse portfolio is a good thing, and investing in promising companies or in an entirely new movement is a good and sound strategy.

But ESG is an even wiser option as investors all over are encouraging companies to make changes to their financial reporting. There are governments demanding companies measure carbon emissions and environmental impacts, and there are many other companies taking their own initiatives to adopt ESG values.

Both inside and outside the investment industry, many have noted how focusing on the short term is a big mistake when you account for the larger factors at work. Even if American politicians try to squash ESG in their country, it’s not going to stop investors from thinking longer-term about sustainability and company performance. These are factors that can easily be woven together to the point where people wouldn’t even notice or even care.

More Complex Than Attention-Grabbing Headlines

ESG was very much in the news last year, and there is no doubt that it will be even more so in the future. The important thing to keep in mind is that there is so much more that is going on than what a headline is saying or the author is saying. There are many long-term factors at play with ESG, and just because one very vocal country is against it doesn’t mean it’s dead in the water.

The ESG movement is very strong, with investors all over the world encouraging companies to adopt the values and drive the transition to sustainability. The fact that investors are willing to put more money into this makes it clear to companies that if they can do this well, they can be financially rewarded too. 

What’s not to like about that?

To follow company progress via updated ESG ratings, search via our Company ESG Profiles.


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