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ESG investing is booming, and investors are 'winging it when it comes to research'

·Assistant Editor
·4 min read
In this article:
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Interest in environmental, social, and governance (ESG) investing has taken off, and there's no sign it's slowing down. 

And yet, when it comes to choosing assets that align with their values, investors are still relying heavily on brand perception rather than companies' policies on ESG-related issues.

A recent survey conducted by Investopedia and TreeHugger asked respondents to choose stocks that they thought performed best by ESG standards. Surprisingly, many of the top picks were middling from an ESG-rating perspective.

“We listed a bunch of other stocks there, including some energy stocks, just to see how our readers and the TreeHugger readers would react," Caleb Silver, editor-in-chief at Investopedia, told Yahoo Finance (video above). "Many of them chose some of those energy stocks as ranking very high in ESG as well. That tells us they're winging it when it comes to research and associating with brand versus putting the stocks they are interested in into an ESG screener.”

A girl walks on a disused railway track, through what is known locally as the
A girl walks on a disused railway track through what is known locally as the "Tunnel of Love", in small town Kleven some 217 miles off western Kiev May 13, 2012. REUTERS/Gleb Granich

Tesla (TSLA) took the top spot, with 30% of readers associating the electric vehicle maker with ESG values. 

“What's interesting about Tesla is it doesn't score that well, if you look at MSCI's ESG Ratings or Sustainalytics— pick your provider,” Silver said. “They're about right in the middle of the pack.” (In fact, Sustainalytics rated Tesla as having “High Risk,” mainly due to governance issues and labor relations.)

Because ESG encapsulates the trifecta of environmental, social, and governance issues, strengths in one area could overshadow weaknesses in others. This was also the case for the second-ranked company, Apple (AAPL). 

“I think Apple's known for a good employee culture,” Silver explained. “It's what they do with their byproducts of the iPods, the iPhones, the laptops that they make. The waste disposal was a big key component.”

Wildfires burning out of control across the Western U.S. and Canada causes hazy skies throughout NYC and Washington DC July 20, 2021, in New York. Climate is a key factor in ESG investing. (Photo by Lokman Vural Elibol/Anadolu Agency via Getty)
Wildfires burning out of control across the Western U.S. and Canada causes hazy skies throughout NYC and Washington DC July 20, 2021, in New York. Climate is a key factor in ESG investing. (Photo by Lokman Vural Elibol/Anadolu Agency via Getty)

ESG investing is about ethics and 'returns, returns, returns'

Sustainable investing soared in 2020 as inflows into ESG products increased by a record 140%. 

That trend has continued in 2021. Overall, sustainable investing now accounts for a third of all global assets and is projected to reach $53 trillion by 2025.

For these investors seeking information about ESG investments, there are a number of tools at their disposal. In particular, Silver called out the ESG screeners and company ratings from MSCI, Morningstar, Sustainalytics, Yahoo Finance, and Investopedia.

ESG investing worldwide. (Source: Morningstar Direct)
ESG investing worldwide. (Source: Morningstar Direct)

Silver added that efforts by financial services and the media to educate investors about ESG products and themes have been falling short, but that there is a massive opportunity to address this information gap.

“There's tons of information out there,” he said. “It's just that it's not breaking through to the end investor, which is a huge opportunity for us, [but] also a huge opportunity for the investment management industry.”

And it's not just about personal values: Above-average returns — in addition to social issues and combating climate change — enticed investors to the ESG space, according to Silver. 

When it comes to why investors are choosing ESG investments, “by and large, the answer is returns, returns, returns, and especially returns over the long term,” he said.

ESG investing in the U.S. (Source: The Forum for Sustainable and Responsible Investment)
ESG investing in the U.S. (Source: The Forum for Sustainable and Responsible Investment)

The survey also found that young people are particularly interested in ESG investing, indicating that the trend is not going away anytime soon.

“The younger investors are much more interested in investing aligned with their values," Silver said. "They want to invest their dollars where their ethics are. So that's why they choose ESG investments. Older investors are looking for returns, whether that's retirement income or just to generate income over the long term.”

Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.

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