ESG Investing: > 20 false arguments

  1. ESG investing costs return or increases risk. Wrong, see e.g. analysis of over 2000 studies by Friede/Busch/Bassen.
  2. ESG investors are “moralists” or „box tickers“. Wrong: Firstly, moralists do not have to be worse than purely profit-oriented investors, secondly one can earn good money with ESG investments and thirdly, ESG investing is not standardised at all, so that it is not possible to just tick the boxes.
  3. ESG strategies with listed securities are useless. Wrong. Supply and demand determine prices and prices affect financing costs and management compensation etc. (Business administration basics).
  4. Exclusions hurt investors because, for example, fossil energy will still be needed for many years. Wrong. Why should investors with limited funds (=all) „finance“ fossil energy instead of renewable energy?
  5. Index fund providers must invest in all stocks anyway. Wrong. With synthetic ETFs and so-called sampling, index fund providers have scope that they could use „responsibly“. In addition, index fund providers could use and foster strict indices, such as SRI ex Fossil Fuel Indices (SRI: Socially Responsible Investing).
  6. Investment funds must not deviate too much from their traditional benchmarks. Wrong. Active funds even have to deviate from their benchmarks to achieve potential outperformance. And all funds, including more passive ones, could choose strictly sustainable benchmarks.
  7. ESG data/ratings are basically useless. Wrong, see e.g. good returns/risks of very different ESG indices for many years.
  8. ESG ratings are no good, because they vary greatly from one provider to another. Wrong. It is better to have different approaches in competition with each other than uniformly wrong (credit) ratings as we had before the credit (rating) crisis of 2008. Moreover, E, S and G ratings of many providers are quite comparable (mostly MSCI and KLD apparently often rate differently).
  9. If ESG ratings are used, the investment universe is too restricted. Wrong. Capitalisation, liquidity, factor and many other criteria chosen by fund providers themselves very often restrict the providers much more. In addition, diversification over a few securities is often enough to achieve a relatively good risk-adjusted performance.
  10. ESG ratings are carried out too rarely. Wrong. ESG ratings are costly, so that the one-time detailed data collection per year must be sufficient. The returns/risks of ESG indices using these ratings are nevertheless very good. In addition, there are now numerous data providers that allow more frequent rating updates.
  11. Information on current controversies or other current ESG information have to be used. Wrong. The risk of wrong ratings using current controversies and updates based only on machine learning or artificial intelligence is high.
  12. Companies with good ESG ratings are always “responsible”. Wrong. Cluster bomb manufacturers can also have good ESG ratings.
  13. Companies with good ESG ratings are good according to E, S and G criteria. Wrong. With aggregated ratings, good corporate governance can, for example, „compensate“ for poor social behaviour.
  14. Companies with good ESG ratings are already overrated or expensive. Wrong, as can be seen from the performance of SRI indices, which typically have high ESG equirements. Moreover, only a few fund providers or other investors use consistently strict ESG requirements.
  15. ESG Momentum/Progress is a responsible investment strategy. Wrong, because relatively „bad“ companies according to ESG criteria are rewarded with investments and „good“ companies are punished by divestments, because the divestment proceeds are reinvested in „bad“ companies in line with the strategy.
  16. Exercising investors‘ voting rights and corporate engagements are good “responsible” strategies. Wrong, because it is very laborious and expensive to exercise this strategy for all securities in the portfolio, there are few opportunities to exercise influence and the influence of individual investors is typically low. Nevertheless, fund managers prefer this “responsible” strategy, because then they think they can compromise on other strategies. With divestments and high ESG requirements, portfolio managers are more constrained in what they can invest in. Also, with voting/engagement it takes a long time to detect failure which is, in addition, difficult to measure.
  17. Consistent liquid impact strategies are not yet possible because too few companies publish according to the Sustainable Development Goals (SDG) of the United Nations. Wrong. With a sector approach, e.g. investments in „renewable“ energy companies, such a strategy can be implemented even without detailed reporting.
  18. Good ESG investment is only possible with actively managed funds. Wrong, see e.g. the performance of ESG or SRI ETFs.
  19. ESG investing must be more expensive than traditional investments because the ESG data and its analysis cost so much. Wrong. You can see this, for example, in cheap ESG ETFs. Moreover, there are now even some free ESG data sources. For investors, high sales commissions are particularly expensive, which they usually have to pay when they buy active funds.
  20. Advising investors on sustainable funds is particularly costly, because it is a new and not standardized concept. Wrong. It is much easier to explain a good sustainability concept than most niche or quantitative funds or alleged „special features“ of me-too offers.
  21. The choice of responsible funds is already very large. Wrong. For retail customers, offers in Germany have usually only been available for a short time and there are a great many funds that are claimed to be sustainable, but many of these funds often meet only low or anyhow irrelevant sustainability requirements such as the exclusion of cluster bombs.
  22. The sustainability of funds or greenwashing cannot be checked easily. Wrong. The fewer stocks in the portfolio compared to the permitted universe, the more stringent a fund can be.
  23. ESG is a temporary fashion. Wrong. Even MSCI and BlackRock and many others see it quite differently.

(Note: Translated with the significant help of DeepL)

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