ESG investing is about profit, not purpose

ESG has become an integral part of our lives. Take, for example, the S&P 500 ESG index, which has, albeit slightly, outperformed the classic S&P 500 index in recent years. 

Yet a key misconception remains about investments containing environmental, social and governance elements — one that lends credence to critics who equate the ESG concept with greenwashing.

The main purpose of ESG investing is simply to make profits on future developments — there are no other goals. An investor who wishes to change the world for the better should look instead to socially responsible investments (SRIs) and impact investing.

READ MORE: The top 10 best-performing ESG funds of the decade

Therefore, in a discussion with clients about ESG, financial professionals should not bring green or social agendas into play. Furthermore, it's important to clearly delineate the differences between ESGs, SRIs and impact investing so there is no confusion among the strategies. 

As I've said, in some circles, ESG is equivalent to the practice of greenwashing — overstating or misstating the environmental or social impacts of an investment. This is another downside of confusing ESG with SRI and vice versa. Again: ESG investments do not aim to change the world. Why, then, consider environmental, social and governance factors at all? The answer is simple: to calculate risks when selecting assets for investment. 

The reality is that environmental, social and governance factors now make up the foundation of portfolios. Far from being a passing trend or a supplement to investing, they have become the basis, the key driver, of sustainable development. If a company is not on the ESG agenda, there is no need, in my opinion, to include its shares in a portfolio. 

Investors ignore ESG factors in an investment at their peril because those factors exist to solve real world problems. Take electric cars. Previously they were the fashionable thing to own. Now, however, investors understand that they can't afford to ignore the problems associated with continued use of gasoline engines. It's a good illustration of how ESG is more focused on the logic of investing in economic development rather than ethical concerns.

READ MORE: Here's how to nail the ESG conversation with clients

Regulators onboard

The evolving regulatory framework is also a signal that investors will not be able to profit without considering the principles of ESG. 

For example, in 2022 the European Commission adopted a sustainable development plan for the coming years in which practically all the aspects of the ESG agenda come into play. Therefore, all the processes and innovations taking place in the EU should inevitably be built on the concept of sustainability.

It is not only the EU that has succeeded in integrating these principles. In the U.S., where investors also actively ride the ESG wave, sustainability concerns have become part of the SEC's supervision. This regulatory body is just doing what I mentioned above — ensuring  that asset managers' claims really match the reality of companies' sustainability practices.

ESG permeates portfolios

All portfolios today contain some element of ESG — otherwise, they would not be efficient. But in the process, ESG has become a very important factor in how we feel about the world. 

When outlining ESG concepts, advisors must match words to actions and not confuse ESG with SRI and impact investing. Remember that ESG is about calculating risks, while the others are about problem-solving.