ESG investing
ESG investing has returned to the headlines as a bipartisan group of Senators, including all of the Republicans joined by Joe Manchin, are attempting to block Biden’s reversal of Trump’s restrictions on ESG investing in 401ks, but what does all this mean?
First, what is an ESG investment? ESG stands for Environmental, Social, and Governance, the three criteria used to evaluate a company and allow investors to invest in companies with similar values as their own. The ultimate goal is to give investors the ability to use their resources to get companies to act as good stewards of society by giving them a financial incentive while giving investors some return on their investment.
So why is there pushback? Many see this as a zero-sum game as investors divest from companies that aren’t living up to the values of investors, but they miss it doesn’t end there. Companies can change their behavior and get reevaluated, and they should. We want to create a more sustainable world, and this is the way to do so. I was glad to see Biden reverse Trump’s ruling, which was short-sighted; this rule change should be less controversial as it only allows investment managers, including fiduciaries, to consider ESG guidelines in their suggestion criteria. In addition, ESG investments would still compete against other investments, and individuals and financial advisors can access their value regarding financial returns.
As investors are more interested in investments that align with their values and create positive impacts, the government should be more hands-off and allow individuals to make sound investments. I am a proponent of ESG investing as they factor in more long-term sustainability metrics, and I believe that makes them better investments. I think it is still important to consult your financial advisors and do what is best for you. Risks are attached to all investments so be careful.