Challenges to and criticisms of ESG investment

7 minute read

Whilst sustainable and ESG investing has been increasingly broadly accepted and implemented in recent years, it still faces resistance and challenges throughout the investment decision process.

Some of the main reasons for resisting ESG investing are:

  • Perception that integrating ESG factors into investment decisions will have a negative impact on performance
  • An interpretation of fiduciary duty that does not recognise ESG factors as being material, and therefore views them as sitting outside fiduciary responsibilities to look after the financial wellbeing of beneficiaries
  • Investment consultants and retail financial advisers have historically often not been supportive of ESG products  
  • A belief that all ESG risks and opportunities are already priced in by the market in accordance with modern portfolio theory

For investors who do wish to incorporate ESG, challenges still exist:

  • Disclosure and data – inconsistent, scarce, incomplete, and unaudited data
  • Lack of comparability between ESG ratings agencies
    • Different reporting and accounting standards
    • Geographies and cultures
    • Use of terminology
  • Inconsistency of judgment regarding materiality
  • The impression that significant resources are needed.

Criticisms of ESG investing

Critics and skeptics of ESG investing are often most concerned by the precision, validity and reliability of ESG investment strategies.

The CFA Institute identifies 4 key concerns most often expressed:

  1. Too inclusive of poor companies – ESG mutual funds and ETFs often hold companies that may be acknowledged as ‘bad actors’ in one or more ESG space
  2. Dubious assessment criteria – the criteria for selecting ESG criteria is subjective and often dependent on a given ideology or political viewpoint, and non-material or socio-political factors may be over-emphasised.
  3. Quality of data – ESG data from companies is inconsistently reported and unaudited
  4. Potential lack of emphasis on long-term improvements – by screening based on current ESG performance, investors may exclude companies with potential to perform well in this space in the longer term

The Passive Vs Active debate