Despite varying degrees of impact, the allure of an investment policy with the potential to affect corporate and social change has been a recurring theme among a portion of socially-minded investors. Otherwise known as “Socially Responsible Investing (SRI)”, or “Environmental, Social, & Governance (ESG) Investing”, we have seen various attempts of integration into the investment process since the 1970s.
The Achilles heel of ESG today, as with all previous iterations, is fiduciary responsibility. Plan sponsors make decisions for recipients with a wide range of social orientations; they are unable or unwilling to sacrifice return for social or other exogenous factors and will switch mandates given underperformance. Thus, the argument for ESG investing cannot be that investors are willing to compromise return in order to “feel good” about environmental or social factors. Rather, the argument for ESG must be that investing in such a manner leads to equal, or superior performance. Of course, there will always exist some mission-driven endowments and foundations that will accept a trade-off, but by and large, no such trade-off will be acceptable. Herein lies the hurdle. The data is mixed. Consequently, there are a plethora of investors who remain unconvinced that ESG investing has the ability to outperform.
Until those charged with fiduciary duty are convinced that ESG-investing truly leads to greater long-term performance, the market will remain split in their views.