In what’s likely the result of an increasingly partisan divide in Washington, D.C., environmental, social, and governance (ESG) investing is more frequently viewed through a political lens.
One side argues it’s merely values-based investing, while the other argues ESG is an imposition of values. That could be one reason why 17 states’ attorneys general are examining ESG. The good news is that the AGs are looking into ESG from the perspective of investment risk.
“The consideration of ESG factors, like many other material factors that affect the value of a potential investment, can provide significant financial benefits to investors,” according to a statement issued by California Attorney General Rob Bonta’s office. “For example, investors would be wise to consider the financial consequences of investing in a company that fails to take climate-change risks into account. In the past five years alone, extreme weather events caused or exacerbated by climate change, such as hurricanes, wildfires, extreme heat, and extreme drought, have cost U.S. companies more than $760 billion — a figure that is only expected to rise.”
This isn’t necessarily “bad” scrutiny. In fact, it’s possible that as the attorneys general delve deeper into ESG, the outcomes could be encouraging for exchange traded funds, such as the SPDR S&P 500 ESG ETF (EFIV) and the SPDR SSGA Gender Diversity Index ETF (SHE).
The SPDR MSCI USA Climate Paris Aligned ETF (NZUS) is another example of an ETF that could benefit from ESG passing regulatory muster, because more advisors and investors are looking for climate-driven portfolio solutions.
“The average cost per year resulting from climate disasters increased from $19.5 billion in the 1980s to $89.2 billion in the 2010s; in 2021, the cost to the U.S. economy was a whopping $148 billion. This does not include indirect costs associated with climate change, such as short-term and long-term healthcare costs resulting from wildfire smoke inhalation. These economic impacts pose serious concerns for more than 50% of U.S. households with money invested in the stock market,” according to Bonta’s office.
The combination of half of Americans having some exposure to the equity market and booming adoption of ESG ETFs is likely a sign that more investors in the former category will eventually become part of the latter. Said another way, regulators — if they do their jobs effectively — could actually spur adoption of ETFs such as NZUS and SHE, among others.
For more news, information, and analysis, visit the ESG Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.