ESG (environmental, social, and governance) investing has been a hot topic lately. Asset growth has reflected this, picking up over the last couple of years. But growth has generally been on the institutional side (pensions and endowments), while retail clients and advisors have been slower to adopt. This seems strange given that younger generations are starting to save more for retirement and also have more interest in social issues than past generations. The disconnect may simply be a lack of education on the world of ESG investing. As an introduction, below I bust the three common myths of ESG investing and offer three important truths that should make ESG top of mind when considering investor solutions.
Myth No. 1: ESG limits diversification benefits.
ESG investors favor companies that exhibit positive attitudes and behavior toward the environment, social change, and corporate governance. By contrast, investing based on broad market-cap indices means favoring the most highly valued companies. So, without knowing anything else about ESG, investors already know they are getting something better valued than a broad index. Add in the higher-quality nature of ESG companies, and ESG looks even better. Diversification should be achieved by investing in various uncorrelated asset classes in a portfolio, not by benchmark hugging.