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  • If you've heard about ESG investment

  • you know that it refers to companies

  • that focus on environmental, social, and governance issues.

  • What we'll talk about today is how

  • it is fundamentally changing the investment landscape.

  • There are a variety of motivations

  • behind the ESG movement.

  • While some investors want their money to go towards companies

  • and projects that will change the world,

  • others simply want to minimise the harm that their investments

  • have on communities and ecosystems.

  • Then there is a third group who are looking

  • to use ESG principles to protect their own portfolio

  • from potentially negative impacts.

  • But no matter the motivation, all ESG investors

  • want to make a return on their money.

  • If it sounds straightforward, just know that this is much

  • harder in practise than in principle.

  • For example, how do you decide whether a company deserves

  • the halo of being classified as ESG-friendly?

  • Take Tesla.

  • The company makes electric cars which

  • are better for the environment than traditional ones.

  • So you would think this investment

  • would have a positive effect on the environment

  • - but not so fast.

  • Hey, everyone.

  • There are questions around the environmental impact

  • of mining nickel, which Tesla uses in its batteries

  • and is the electricity used to charge

  • a car coming from renewable or non-renewable sources.

  • Tesla has also announced that it made a $1.5bn investment

  • in Bitcoin.

  • And as has been pointed out by Bill Gates,

  • mining Bitcoin is an environmentally-damaging

  • activity because of the energy it requires.

  • So what do you do if you want to invest

  • in environmental progress?

  • Do you buy Tesla shares or not?

  • The answer is not so clear cut.

  • These days most people don't have to make that decision.

  • A rise in passive investing means

  • that most folks choose an index-tracking fund,

  • like an ETF or a mutual fund, which

  • puts their money into a basket of company stocks

  • that track an index.

  • To create an ESG-focused index simply

  • means that the companies in that basket

  • have met certain criteria that make them ESG-friendly.

  • But what does that mean in reality?

  • Well it's still up for debate.

  • Nonetheless, the sheer number of indices

  • that provide an ESG focus have exploded from 2019 to 2020,

  • increasing by 40 per cent, according to the Index Industry

  • Association survey.

  • The amount of money going into ESG assets has also exploded.

  • In the US in 2016 there was $8.1tn

  • in professionally-managed ESG assets,

  • according to the Forum for Sustainable and Responsible

  • Investment.

  • By 2020 that number grew to $17.1tn,

  • which is more than a 100 per cent increase in just four

  • years.

  • And as for figuring out which companies to put in those

  • indices we talked about, many index providers

  • rely on various metrics that score companies

  • based on their ESG impact.

  • Examples of metrics are things like exposure

  • to carbon-intensive operations, energy efficiency, human rights

  • concerns, et cetera.

  • However, there can be discrepancies

  • between the ratings agencies, even when they're

  • scoring the exact same company.

  • Often, index providers will have a committee

  • that helps make decisions on which companies to include

  • and which to exclude.

  • This is important because the company stocks they include

  • will benefit from more investor cash.

  • But the subjectivity of classification

  • has led to controversy over whether some funds are truly

  • investing in companies that fulfil the vision of ESG

  • or whether some index providers are merely

  • using it as a marketing term and putting the ESG label on funds

  • that don't really merit it.

  • This is why it's so important for investors

  • to carefully read the methodology and perspectives

  • behind an ESG index before they invest

  • to ensure that they are getting something that truly reflects

  • their goals.

  • So a question you may be asking right now

  • is whether the returns of those ESG funds

  • are better or worse than traditional investments.

  • In this chart showing the performance

  • of an ESG fund versus a standard fund,

  • you'll see that they perform pretty much in parallel

  • to one another.

  • This is just one example, of course.

  • Some ESG funds may do better than the benchmarks.

  • Others may do worse.

  • But the beauty of ESG is that, in general, investors

  • don't need to worry about sacrificing performance

  • for doing good.

  • Perhaps, that is why we see so much money

  • jumping on the ESG bandwagon.

If you've heard about ESG investment

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What does ESG-friendly really mean? I FT

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    洪子雯 posted on 2021/04/12
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