Socially responsible investing has gained traction in recent years. Traditionally, an underperforming niche product ignored by most serious investors, it has become a key investment rationale and a differentiator among portfolio managers.
There has been tangible growth of investment in companies that make a positive impact in terms of environmental, social, and governance issues—or ESG for short.
As of 2018, $12 trillion of professionally managed assets consider ESG factors in their criteria, according to a 2018 report issued by the Forum for Sustainable and Responsible Investment. That represents 25 percent of all professionally managed money in U.S. assets, and a 38 percent growth since 2016.
Despite the prominence of ESG in portfolio construction, ESG investing is still largely confined to U.S. companies. In other words, only U.S. companies are judged on their ESG impact.
The fact that ESG only applies to U.S. companies—compared to their counterparts around the world, which are competing in the same global market for customers and the same global financial markets for capital—is increasingly concerning.
This double standard is most egregious when discussing investing in China. China is the world’s second-largest economy, and wishes to be viewed as an equal partner in ongoing negotiations toward a trade deal with the United States. Its technology companies, such as Huawei, seek to have a level playing field when pitching services to global governments, and, in general, Beijing believes its stock markets are as transparent, liquid, and prestigious as those in Hong Kong, Singapore, and Tokyo.
Yet when it comes to investing in Chinese companies, foreign investors suddenly toss ESG factors out the window. Investment managers and index providers are eager to jump into the Chinese market, abandoning the otherwise pragmatic, skeptical (and with ESG criteria, supposedly ethical) lens through which they judge other stocks. At best, it’s disingenuous—at worst, it almost seems there is Chinese political influence at work.
Palpable ESG Growth
Definitionally, ESG is very broad—it’s a measure of how “good” a company is outside of financial performance. Entire industries can be expelled, such as those involved in selling tobacco and alcohol, or manufacturing guns and ammunition. It can apply to a company’s environmental impact—do its products help or harm the environment, what is the firm’s carbon footprint, or does it produce toxic waste, and how does it mitigate the effects?