Pros and cons of ESG investing

The decision whether or not to buy ESG stock can be debated for a while, but ultimately, it is the investor’s decision.


Jakob Polacsek - Flickr

World Economic Forum discussing the ESG data.

Investing has become a way to make money, whether that is by being an investor or a financial adviser. Those in this business study the stock market to make money by spending money. 

Those who invest in a company deal with the ups and downs of the business’s achievements and fall-outs. The overall end goal is to gain more money than what was originally put into the business.  

Many corporations may succeed profit-wise, but treat their employees poorly, unnecessarily intoxicate the environment, and do more inhumane actions that an investor may not be aware of when purchasing their stock.

The Environmental, Social, and Governance (ESG) index was created for those aware of and willing to sacrifice profit for moral means. It falls into the category of socially responsible investing, which puts pressure on both the investor and the companies to fall into what is acceptable according to ESG standards.

The three words in the acronym define the most important aspects to consider according to company analysts. 

The E stands for the environmental footprint of companies that should be taken into account. Examples of this include the company’s energy usage, impact on climate change, deforestation, waste production, pollutant circulation, water usage, and greenhouse gas emissions.

The S is for social, which relates to the treatment of the producers and consumers of the establishment. Human resource management, employees’ working conditions, clientele feedback, treatment of the suppliers, impact on the community, workers or overall human rights compliance, equal pay initiatives, diversity, and especially data protection all fall under the social section of ESG investing.

The final pillar of ESG is for governance. Judgements of companies regarding governance are based on corporate officers who are hired, the management, the structure of the company’s corporate board, the company’s legal issues, and the corruption within the business. 

The ESG criteria is not necessarily created for the companies being evaluated, but rather for the person determining if the company is worthy of his or her investment. By investing in ESG funds, companies are simultaneously incentivized to make changes for the sake of people buying stock and becoming a part of the ESG index.

With all three parts of ESG considered, the question that those looking to invest may be asking is, “should I invest in it?”

The increase in the number of people investing in the ESG index makes it more imperative for companies to become conscious of their environmental, social, and governance influence on their community and workspace. Companies will begin to put more effort into making money and creating a positive environment for their world and workers that people would want to invest in.  

If a company relies on stock, they rely on people and their opinions. Most investors want to make money, but if the company that makes a lot of profit goes against their morals, it is up to the investor to decide if they want to continue to invest. If someone does not condone smoking, it is unlikely that they will invest in Marlboro Cigarettes no matter how much profit they may provide. 

When a company passes the ESG screening, they are added to the index fund, which increases its chances of gaining investors because of ESG’s popularity. However, just because a company has environmentally and socially correct policies, it may still be booted from the index. 

ESG is admittedly influenced by public opinion. Companies that do not comply with the public’s general standards may face criticism which can result in the ESG index, not including the company to maintain their morally correct image. 

Those in support of ESG investments argue that people who invest would have both financial benefits and ethical satisfaction. More importantly, companies that have good ratings by ESG typically do not face legal issues. Companies that have social, environmental, and governance problems are more likely to face a lawsuit, thus plummeting their stock.   

Businesses that recognize ESG’s importance by investors choosing it to determine their investments will most likely comply with ESG’s demands. ESG is the incentive to have better businesses around the world.

On the other hand, investors that choose not to put their money into ESG stocks have many reasons to be cautious of the debatable investment. Some people choose to do their research and find companies that they support if they want to be a part of socially responsible investing instead of investing in ESG immediately. 

A common misconception is that ESG only incorporates companies that are environmentally and socially upstanding. For instance, the ESG stocks include fossil fuel companies, and those who are more environmentally conscious may not want to put their money into one of those companies, even if they are approved by ESG.  

One problem regarding ESG inspections is that they are not always accurate. Companies in the U.S. are not required to track their ESG performance, so companies that choose not to share their ESG achievements will be judged by what they advertise themselves as. This lack of transparency leads to inaccurate praise and acceptance into the fund.  

While some companies can be profitable that are part of the ESG index, that is not always the case. Investors looking to make money may be disappointed by the smaller pool of stock that is not chosen because they are profitable, but because they are ethical.    

In addition to not being completely sure of the stock’s profitability, investors face more expensive investing because ESG stocks have grown greatly in popularity.

Pascack Hills Financial Literacy teacher and Investment Club advisor, Corin Gamgort, was asked about her opinions on ESG stocks.  

“There are some pros and cons to ESG investing. Even with the top companies (ranked with ESG indexes) doing well on a consistent basis, it is very challenging to invest in that manner.  For example, if you look at pollution factors, you and your company are at the mercy of government regulations and it can hurt your stock and your company if promises to investors are not met.”

Even with the top companies (ranked with ESG indexes) doing well on a consistent basis, it is very challenging to invest in that manner. 

— Corin Gamgort, Hills Financial Literacy teacher and Investment Club advisor

Instead of depending on ESG stock, Gamgort “like[s] to look at a companies’ track record, products in the pipeline, and their mission statement. ESG investing can be one factor, but not the only way to invest.”

The decision whether or not to buy ESG stock can be debated for a while, but ultimately, it is the investor’s decision. ESG is a great option for socially responsible investing, but it is not the only option. The stock market has been and will continue to be unpredictable, so it all depends on what the investor and investing advisor decide is best, whether for profit, for principle, or both.  

Hills has provided information regarding stocks, whether through the financial literacy class or Investment Club. Any student learning the skills they need to create a company or become an investor needs to know every perspective of what he or she is getting themselves into. While ESG funds have proven to be controversial over the years, it is important to consider them when investing and judging a company or creating a company that may be judged.