Misconception 1: ESG Investing is more expensive.

Many people think that investing in companies that care about the environment, social issues, and good governance (ESG) is more expensive than traditional investing. However, according to a study by Morningstar, it was found that in Europe, ESG funds actually charge lower fees than non-ESG funds in most categories. This is because there is increased competition among ESG funds as their popularity grows. In some categories, ESG funds are even 30% cheaper on average than non-ESG funds. Although passive ESG funds may charge a small premium compared to traditional passive funds, overall, ESG investing can be cost-effective.

Misconception 2: ESG Investing doesn't perform as well financially.

Another misconception is that ESG investments don't perform as well financially as traditional investments. However, according to Morningstar, the majority of ESG funds have actually outperformed their traditional counterparts over three, five, and ten years. In fact, during the market crash caused by the COVID-19 pandemic, ESG investments proved to be more resilient. This is because many ESG funds focus on technology stocks and avoid carbon-intensive industries like aviation, which suffered during the pandemic. The pandemic has also reinforced the value of sustainable investments, and investors have seen positive returns from their ESG portfolios.

Misconception 3: There are only a very limited number of sustainable investments.

Some people believe that there are only a few sustainable investment options available, limiting their choices. While it's true that sustainable investors use a negative filter to exclude certain industries, such as oil, weapons, and tobacco, there is still a wide range of profitable stocks to choose from. There are hundreds of companies that have good environmental, social, and governance credentials, offering products or services that make a positive difference. The sustainable investment sector is growing, and there are increasing opportunities for investors to align their values with their financial goals.

Misconception 4: ESG Investing is just greenwashing.

Greenwashing refers to misleading claims made by companies or funds that they are environmentally friendly or socially responsible when they are not. While there are isolated cases of greenwashing, the sustainable investment sector is working to develop reliable metrics and standards to ensure that funds deliver on their promises. One of the challenges is the lack of shared definitions and consistent scoring criteria among rating agencies and investment managers. However, regulators and industry initiatives, such as the European Union's Sustainable Finance Action Plan, are working to address these issues and improve the credibility of ESG investing. Building consensus on measuring and reporting impacts is crucial to providing transparency and accountability in the sector. In conclusion, ESG investing is not necessarily more expensive, it can perform well financially, there are numerous sustainable investment options available, and efforts are being made to combat greenwashing. ESG investing offers opportunities to align financial goals with environmental and social values, providing a more secure future for both investors and the planet.

Greenwashing

Some fund managers may use misleading claims about being environmentally friendly to attract customers. This is called "greenwashing." They may say their funds are focused on ESG, but in reality, they may not be making a significant positive impact.

Covering poor performance

Companies publicly embrace ESG principles to cover up poor business performance. When managers underperform in terms of earnings, they often talk about their focus on ESG. But when they exceed earnings expectations, they don't mention ESG as much. This suggests that some companies may use ESG as a way to distract from their financial problems.

Different approaches to ESG funds

There are different approaches to ESG funds. Some funds may claim to be environmentally friendly but still invest in fossil fuel companies. This can be confusing for investors who want to make sure their money is being used for good causes.

Fund regulations

There have been debates about the standards for ESG funds. Some politicians and regulators have raised concerns about incomplete disclosures by companies and the need for clearer guidelines. This can make it difficult for fund managers to design products that meet all the requirements.

ESG funds is still a work in progress. To address the problems you can:

Educate yourself: Learn about ESG principles and how they should be applied. Understand the criteria and standards that define genuine sustainability practices. This knowledge will help you make informed decisions when choosing ESG funds or investments.

Research fund managers: Before investing in an ESG fund, research the fund manager's reputation and track record. Look for transparency in their disclosures and reports. Check if they have received any recognition or certifications from reliable sources in the field of sustainable investing.

Verify sustainability claims: Don't rely solely on marketing materials. Dig deeper into a fund's holdings and practices to verify their sustainability claims. Look for evidence that they align with your values and truly prioritise environmental, social, and governance factors.

Support independent research: Look for reputable sources of independent research and analysis on ESG funds. These organisations often provide unbiased assessments of fund performance and adherence to ESG principles. Use their insights to inform your investment decisions.

Diversify your investments: Consider diversifying your portfolio beyond ESG funds. Look for other sustainable investment opportunities, such as impact investing, renewable energy projects, or socially responsible companies. By spreading your investments across various sectors and asset classes, you can reduce the risk of falling into greenwashing traps.

Engage with companies: If you are a shareholder, attend annual general meetings, ask questions, and voice your concerns about companies' ESG practices. Participate in shareholder advocacy groups or join initiatives that promote responsible investing. Your active involvement can push companies to improve their sustainability efforts.

Advocate for stronger regulations: Support efforts to establish clearer guidelines and stricter regulations for ESG funds. Write to your local representatives or join organisations that advocate for responsible investing practices. Encourage policymakers to create standards that prevent greenwashing and ensure transparency in the industry.

More stability

It is a well-known concept that the higher the risk taken, the higher the return when it comes to investing. However, it also entails that you might lose all your money all of a sudden. For potential investors looking for relative financial stability, investing in ESG indices is a good choice as it has a greater resilience to downturns in the stock market. During the pandemic, ESG indices show a steady growth when their non-green counterparts declined. This is because ESG indices invest in sectors like tech and pharmaceuticals which face great demand for medicine and video calling technology. Lockdowns contributed to less transportation on the road and factories halted production, leading to a fall in fossil fuel demand. Hence, ESG investing is proven to be a stable investment choice.

Long-term outlook

Awareness of sustainability and the environmental crisis has never been at such a high level. The trend of companies implementing and following sustainable operations and production methods spread like wildfire, with the government's cooperative regulations in favour of this change. With the government and society backing these environmental efforts, the prospects of green companies can only be positive. Moreover, investing in companies that welcome this sustainable business trend means that they are well-equipped to navigate future changes, and could expect overall positive returns.

Encouragement for influential companies on green effort

What's even more rewarding if you could do good for the earth while gaining financially? All businesses need capital for financing their operations, expanding and innovating. By investing in ESG indices, companies are encouraged to spend their extra capital in innovating and installing infrastructure that aids more eco-friendly production. Moreover, you become a shareholder to a large company once you invest in their ESG indices, which gives power to advocate for lower carbon emissions and using renewable energy in their investors, normalising greener operations and production methods.

Combating global environmental crisis

Large MNCs and conglomerates take up most of the market share of the economy, and are often seen as culprits behind climate change, resource depletion and pollution. But by investing in ESG indices that support companies with a motive to go green, you can act as the catalyst that pushes sustainability towards a global level.

What is ESG rating?

An Environmental, Social and Governance rating / score is the assessment of the ESG attributes of an entity. The entity could be companies, products or sovereigns. There are a number of criteria that go into evaluating an ESG rating, with each aspect being considered separately and then an overall score is determined.

ESG ratings can cover a wide range of things. For example, an ESG rating can assess an entity's exposure to, and management of, ESG risks (such as flooding risk) and/or ESG opportunities (such as trends like clean technology). Alternatively, it can assess an entity's impact on wider ESG matters (such as a company's impact on air quality due to its carbon emissions). ESG ratings are sometimes compared to credit ratings, but they are inherently multidimensional, unlike credit ratings which focus on only the creditworthiness of an entity or financial instrument. source

ESG has grown in recent years and is becoming more important within the realm of investing. There are multiple different ways of evaluating a companies or index ESG score which causes inconsistencies and confusion when comparing them. However, having an ESG score is becoming more of an industry standard and is also becoming a specialised career path.

Clearly within the wider public a lot of emphasis is put on the environmental side of the ESG Score, but the other two components are equally important within this ranking.

How is ESG Calculated?

An ESG score is usually measured on a scale 0 to 100 ( or 'AAA' to 'CCC') with a higher score (above 70) demonstrating a more sustainable organisation. Clearly data from the organisation has to be collected and then analysed, and usually in order to minimise bias larger companies will outsource the calculation of their ESG score to a specialist firm.

The information is gathered either:

• Quantitatively - Through information made available by the firm in line with international standards such as the Global Reporting Initiative, SASB (Sustainability Accounting Standards Board) standards, CDP (Carbon Disclosure Project) and the UN Sustainable Development Goals;
• Qualitatively - through surveys, interviews, and site visits, as well as data from other sources. Various techniques are used to analyse this data

However, different firms will use different methods in order to calculate an ESG score such that the same company can attain a wide range of scores, and so they are most likely to advertise the highest score. Here are some rating agencies for example:

1. MSCI ESG Fundamentals
2. Sustainalytics
3. Corporate Knights
4. Corporate Knights
5. Bloomberg ESG Data Service
6. Dow Jones Sustainability Indices

Here is an issue as there are different ways of measuring ESG and there isn't an industry standard way of assessing it. Eachy of these different calculations will yield a different result and so it is hard to compare values between them.

The government has launched a consultation on whether ESG ratings should be regulated and folded into the responsibilities of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). On a scale from 0 to 100, a score less than 50 is considered bad, and one above 70 is good.

Advice to follow

• Diversity of opinion is important and so if you are looking at an ESG score for a potential investment try to attain multiple scores from a multitude of methodologies.
• Analysis: Having multiple sources gives you a well rounded understanding of a company and its actions, giving you a better understanding of whether they align with your values. ESG ratings can cover a wide range of things so it is important to know what exactly the score is analysing and means in the context given.
• Verification: By having multiple sources, you have great confidence in the true ESG impact that a company is having.
• Benchmarking and peer comparison: ESG ratings often include benchmarking and peer comparison features. By looking at ratings from different providers, you can evaluate how a company's ESG performance measures up against its industry peers. This can provide insights into relative strengths and weaknesses and help identify leaders and laggards within a sector.
• Enhanced decision-making: When making investment or business decisions based on ESG factors, considering multiple ratings can provide a more informed and balanced perspective. It allows you to weigh different viewpoints and consider a broader set of ESG considerations to make well-informed decisions aligned with your values and objectives.