ESG Investing: Political Talking Point or Investing Opportunity?

ESG investing: it's not for everyone.

Since as early as the 1960s, a growing body of investors have sought to align their portfolios with their moral compasses through socially responsible investing. Now commonly referred to as ESG investing, the practice blossomed into a $17 trillion industry by 2020. However, recent criticism from the political right has led many Americans to question the integrity of these funds. What is ESG investing and is it putting your savings at risk?

What is ESG investing?

ESG, or environmental, social, and governance, investing is just one of the many ways that investors decide which stocks and bonds to buy. While some investors seek only to maximize their return, ESG investors might also consider a company's social responsibility before buying its shares. Some common measures of ESG-friendly companies include climate change policy, equitable treatment of community shareholders, and diversity of leadership.

Consider that every single investor evaluates the same stocks and bonds based on different criteria. A young investor with plenty of time in the market might accept a higher risk in exchange for a potentially higher return. A retired investor may prefer to buy a low-volatility, high-dividend stock in exchange for predictable cash flows. ESG investors are ordinary investors like the rest of us -- they just happen to place a lot of value in a company's social responsibility initiatives. In a free market, those investors have just as much right to buy shares of socially conscious companies as your grandmother has a right to buy Verizon stock.

The rise of multi-billion dollar ESG funds in the last few decades is an extension of those same free market principles. When millions of investors with billions of dollars want to buy socially conscious stocks, large investment companies are incentivized to create funds that buy those companies. Think about the funds that buy exclusively in one industry or global region, such as airline funds or emerging market funds. ESG funds exist because of the same principle, just different criteria. And companies that offer large ESG funds, like BlackRock, aren't especially socially conscious or progressive, they're simply filling a need in the market.

The anti-ESG movement

Prior to last summer, the term "ESG investing" wasn't in the average American's vocabulary. However, that quickly changed once right wing media pundits began picking up the term and lambasting it for what they referred to as its progressive values.

Now, House Republicans on the House Financial Services Committee have taken up the call. The Committee recently created the ESG Working Group, tasked to "combat the threat to our capital markets posed by those on the far-left pushing environmental, social, and governance (ESG) proposals." The nine-member body will be led by Representative Bill Huizenga (R-MI).

Meanwhile, some on Wall Street have launched anti-ESG funds. A fund launched in August, and heavily promoted by right wing personalities, seeks to counter the climate conscious nature of ESG funds with a fund holding almost exclusively oil and gas stocks. This and other funds are highly conservative, both in their pitches to shareholders and in their underlying holdings.

Are you invested in ESG?

The fear of millions of Americans is that their hard-earned savings are being put to use in a way that runs counter to their values -- but there is little need to worry. If you have to ask whether you're invested in ESG funds, you are almost certainly not.

How your self-directed accounts, such as IRAs or brokerage accounts, are invested is entirely up to you. And if you're worried that an ESG fund has somehow snuck into your 401(k), don't be. Only 3% of employers offer ESG funds in their 401(k), and even if your company does, you are required by law to have at least two other investment options. Currently, less than one-tenth of one percent of all 401(k) funds are invested in ESG funds.

Are ESG investors getting the best return on their investment? Probably not, at least from a monetary standpoint. Are ESG funds ruining America's financial markets? No, ESG funds are a product of those free markets. Are millions of Americans being forced to invest in "woke" companies? Absolutely not. The bottom line is this: if you don't want ESG funds in your portfolio, don't buy them.