Environmental, Social, and Governance Investing
A CFA's Review of the Pros, Cons, & Pitfalls of ESG Investing
By: Trajan Wealth
Those who favor ESG factors as part of the investment decision-making process argue that it produces better investment returns over time, as companies with higher ESG scores have superior investment returns.
On the other hand, those who cast a skeptical eye on ESG measures are focused on the traditional metrics of a balance sheet, income statements, and absolute and relative valuation to determine if the stock or bonds of a particular company represent an attractive investment opportunity.
ESG 101: How It Works
Incorporating ESG into the investment decision-making process is a recent phenomenon. Traditionally, financial professionals will evaluate a potential investment based on financial analysis, relative valuation, and estimates of the entity's future growth.
The philosophy behind ESG is based on the belief that choosing investments/
Moreover, the process becomes even more difficult as determining an ESG score for a particular company is subjective. Therefore, the ability to quantify most ESG measures is complex and fraught with pitfalls.
"One of the risks of using ESG factors in the investment selection process is that management takes their eye off the ball, and the company's fortunes suffer as a result," said Sterling Russell, CFA at Trajan Wealth, LLC.
What The Future May Hold for ESG
Based on broad support for using ESG factors in decision-making, it is likely here to stay. However, ESG factors will likely evolve over time as more data becomes available.
In the interim, a continued focus on fundamental analysis —balance sheets, income statements, relative valuations, and projections of future performance—
About Trajan Wealth
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