SOURCE: Legg MasonDESCRIPTION:
Environmental, Social and Governance (“ESG”) investing is frequently misunderstood and these misconceptions have been passed around the investing world like a game of telephone. For those who view ESG investing with skepticism, ClearBridge Investments emphasizes that investing in ESG strategies can lead to continued growth and debunks the FIVE most popular myths about these strategies.
MYTH: ESG strategies underperform.
DEBUNKED: Numerous academic and investment industry studies have shown through consistent, performance-based evidence that an ESG investing approach can perform as well as the market, or even outperform based on the product and manager. On the contrary, these studies confirm that ESG principles have a positive impact on long-term performance. This makes sense when you consider that ESG best practices such as environmental and product safety, workforce diversity and strong corporate governance all contribute to shareholder value while lowering certain company or industry-specific risks.
MYTH: ESG is about weeding out “sin stocks” – I already do that.
DEBUNKED: While pioneering “socially responsible investing” programs would often screen out so-called “sin stocks” like alcohol or gambling, and other objectionable businesses, and with a variety of advocacy efforts, today’s ESG programs take a more comprehensive approach, including active engagement with company management and advocacy with impact measurement. All three letters in the acronym are important – environmental, social and governance factors all matter. Just look at the governance “G” breakdown at Volkswagen that resulted in its recent settlement with the EPA. The root of the problem at Volkswagen appears to have originated with the company’s top leadership and management, which demonstrates why we believe that corporate governance is a vital component of the fundamental analysis of any potential investment.
MYTH: People shouldn’t invest in ESG because it’s trendy.
DEBUNKED: ESG investing is not just a short-term fad; it’s been on the rise for many years. There has been a dramatic change in investor attitudes towards ESG – it currently captures more than $1 of every $6 in U.S. assets under management, which represents an increase of 76% since 2012. Some investment consultants no longer differentiate between ESG and non-ESG strategies, stating that ESG factors are becoming integrated into the investment process.
Proportion of ESG relative to total managed assets
Source: 2014 Global Sustainable Investment Review
MYTH: ESG strategies have limited influence on corporate behavior.
DEBUNKED: Owning the stocks of companies with strong or improving ESG characteristics is just one way ESG investing can make an impact. Portfolio managers and analysts actively engage with companies on ESG issues on a regular basis, identifying key areas for improvement and in some cases helping firms form or benchmark a sustainability or ESG program. Asset managers can also influence corporate behavior through proxy voting and the adoption or support of ESG-related shareholder resolutions. In addition, asset managers promote and publicize ESG best practices and encourage their portfolio companies to do so as well.
MYTH: If you’re only investing in ESG strategies, the universe of investing becomes too limited.
DEBUNKED: The number of high-quality ESG investment options is increasing within and across asset classes. It’s becoming easier to build an entire asset allocation consistent with ESG principles, including public and private equity, fixed income and alternative assets. More university endowments are responding to student demands for lower carbon impact investments and many foundations are coming to see ESG as a way to extend their influence on issues that they care about and invest donor funds in a “mission-consistent” manner.
Mary Jane McQuillen is a Portfolio Manager and the Head of ESG Investment at ClearBridge Investments, a Legg Mason affiliate. Her opinions are not meant to be viewed as investment advice or a solicitation for investment.
 Performance Studies: Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917
Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies, March 2015
 The Forum for Sustainable and Responsible Investment 2014 Report on U.S. Sustainable, Responsible and Impact Investing Trends. The report indicates that $6.57 trillion, or one in every six dollars (16.6%) in U.S. AUM, is invested in sustainable, responsible and impact investment strategies.
KEYWORDS: Finance & Socially Responsible Investment, Environment and Climate Change, Product Safety, esg investment, legg mason, ClearBridge Investments