ESG Investments Aim For Performance First, Social Responsibility Second

As sustainable investing gains traction, there is growing debate between the need for investments to do good or providing better risk management and performance.

Burton Malkiel, a professor emeritus of economics at Princeton University, author of the classic finance book “A Random Walk Down Wall Street” and father of the passive investing revolution, has warned of the stark differences in various types of environmental, social and governance, or ESG, scoring systems, CNBC reports. While ESG investing could be used as another strategy to passive indexing, Malkiel specifically warned that investors can’t always be sure their ESG holdings are having the desired do-good impact.

Barclays analysts have also questioned whether an ESG focus even leads to improved financial outcomes. The U.S. Department of Labor has taken this stance and recently proposed a rule meant to check retirement plan providers that financial gains can’t be legally sacrificed for social or political benefit.

On the other hand, Armando Senra, head of iShares Americas at BlackRock, which runs a suite of popular ESG-based ETFs, argued that ESG is evolving past these concerns do-good concerns.

“Sustainable has really gone from being about values to being about investment risk and investment performance,” Senra told CNBC. “The fact is that ESG-related risks have an important consideration to asset pricing and ultimately to returns. So, that’s the big change that we have seen in the conversations with all types of clients, whether it’s wealth clients or institutional clients, and that’s the big change that is driving all types of investors to begin to incorporate ESG considerations in their portfolios.”

Senra contended that socially responsible investments can help investors maintain core exposure, preserve performance and better manage risk through ESG goals.

“This is not about not making money,” Senra added. “Ultimately, we have a fiduciary responsibility with our investors. It’s not our money, it’s our clients’ money, and therefore performance comes first. And that’s what we need to offer and that’s why we also have dramatically increased our offering of products for investors so that we can work with them along the spectrum of different options as to how they want to incorporate ESG into their portfolios.”