For many investors, environmental, social, and governance (ESG) issues are material considerations in investment decisions. ESG issues include air and water pollution, climate change, employee retention, data protection, executive remuneration and separation of the roles of chairman and CEO. The bankruptcy of Enron Corp., the oil spill in the Gulf of Mexico, and the death of miners in Marikana, South Africa, are but a few examples of the importance of ESG issues in investments.
When we asked subscribers of the CFA Institute Financial NewsBrief which type of issues they are most capable of including in their investment decisions, governance issues topped the list.
With respect to environmental, social and governance (ESG) issues, which of the following are you most capable of including in your investment decisions?
This result is probably unsurprising. Governance issues (which 45% of respondents chose) tend to apply to companies regardless of the type of business they are in, and they seem to be easier to relate to than environmental issues (which 16% of respondents chose) and social issues (which 6% of respondents chose).
But a third of our 509 respondents reported that they do not include ESG issues in investment decisions at all. It is not clear why. An obvious explanation is passive investing. However, other reasons could also be at work. For instance, ESG issues tend to be difficult to measure, whereas finance relies heavily on quantitative methods. Also, ESG issues play out in the long term, whereas financial markets tend to be focused on the short term.
To see how ESG issues are being included in investment decisions, read the short interview “How to Integrate ESG Considerations into Investments."
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