What Is ESG and Why Should I Care?

It seems like everywhere we turn these days we’re greeted with three letters: ESG. But what is ESG and how has the term taken the investing world by storm?

The easy answer: ESG stands for Environmental, Social, and (corporate) Governance. It signals a set of standards used by socially conscious investors to determine that a company’s practices align with the investor’s values.

The real answer: It depends on who you’re talking to and how the term is used.

Debates about whether or not public corporations have a responsibility to all stakeholders or just their shareholders have raged for decades.

It Starts With Sustainability

Part of this dialogue has focused on sustainability issues. Evolving from the concept of “reduce, reuse, recycle” to “corporate social responsibility” to today’s ESG terminology all centers around the same ultimate concept: corporations play a key factor in mitigating climate change.

The definition of sustainability has itself evolved over the years, driven largely by leadership at the United Nations. And in 2015, the establishment of the Paris Agreement and the UN Sustainable Development Goals set off a renewed effort to systematically approach large-scale attempts at addressing the climate crisis.

A Societal Shift

While many have voted with their wallets for decades, a tipping point seems to have occurred these past few years. Investors’ interests have moved beyond just wanting corporations to be good stewards of the environment into a greater expectation of global citizenship.

Our obsession with ESG is still young, making it hard to deduce answers to questions such as “why now?” But the cultural surge of individuals prioritizing social justice issues coupled with the visibility of social media seems to be part of the equation. Regardless, on a cultural level, ESG is now loosely used to cover issues beyond environmentalism and sustainability. To put it simply, language evolves.

What’s often missed in the discussion of ESG is that the very definition of what is or isn’t considered an ESG investment depends on the opinions and values of the investor.

Take the hotly contested conversation in the U.S. surrounding Roe v. Wade. Mutual funds like the Ave Maria Fund guarantee its investors that all companies in the fund’s portfolio exhibit pro-life practices and policies. This focus may be the ideal investment opportunity to some, and the complete antitheses of a good investment to others.

Be On Alert: ESG Smoke and Mirrors

When an individual decides to invest with intention, they need to ensure the companies they support don’t just say they value certain things, but that they walk the walk, too.

To some degree, ESG can be more about branding than anything else. At least that appears to be the approach used by many big brands today.

If a company claims to care about reducing its carbon footprint, it should, theoretically, also enact policies in line with that value. But that doesn’t always happen (or at least, not all at once). [Link to Andy’s You Oughta Ask article once published] This is where terms like “greenwashing” can come into play. A number of companies have taken heat for playing up minor strides in marketing campaigns while continuing policies in direct conflict with their pro-sustainability message.

Take BP for example, which changed its name to “Beyond Petroleum,” added solar panels onto its gas stations, and launched an advertising campaign focused on BP’s low-carbon energy products. While all touted programs are real, the company’s annual spend was still 96% oil and gas at the time.

Or, for a more nuanced example, consider Starbucks. The company launched the “straw-less lid” back in 2018, but the lid actually contained more plastic than the original lid/straw combo. Starbucks was quick to defend the move, explaining that the new lid was made from polypropylene, a recyclable plastic, while critics of the move fired back with the statistic that just 9% of plastic ever gets recycled.

So how do you determine if the company you’re investing in has values that align with your own? It depends on how passionate you are about the cause, but doing your own research is always the safest bet.

Meanwhile, at The Prosperity People, we rely on an assessment system [link to John Nunan article once published] to verify that ESG fund claims align with actual practices.

ESG: As Defined By You

When our founder, Mackey McNeill, talks about prosperity she’ll often reference the three freedoms of prosperity: money, time, and mind. An important caveat of that concept is that the three freedoms of prosperity are defined by you — the individual.

We can’t tell you what freedom from time looks like; only you can do that. We can’t tell you what mind freedom and money freedom look like because those definitions change from person to person.

Similarly, only you can define what is or isn’t an ESG investment.

So today we’re ending with a curious question: What are your passions and priorities? And how does your spending perpetuate what you value most?