What's going on?
Last week, Goldman Sachs hosted a conference for companies and investors to discuss how their environmental, social, and governance (ESG) responsibilities would impact them – and how to make sure they don’t lose money if the apocalypse arrives.
What does this mean?
Climate change and its implications for the energy industry were front and center of the discussion, especially in light of a recent report estimating the crisis would cost the world’s biggest companies a combined $1 trillion. Some companies see renewable energy as the long-term solution, but they’re still not sure how to store it. In the meantime, natural gas – which is less damaging than coal – appears to be their preferred alternative.
Investors weren’t necessarily having these conversations altruistically: research has shown that the top ESG funds are generating better returns than their less socially responsible peers.
Why should I care?
For you personally: Governance begins at home.
A recent report by the Wall Street Journal found that eight of the top ten ESG funds are invested in oil and gas companies – which may be at odds with what you’d expect from an “environmental” fund (tweet this). There’s not much oversight of ESG funds, partly because there’s no single definition of what actually qualifies as ESG. And because these funds typically aim to track the broader stock market, they still have to invest broadly – including in sectors that aren’t socially responsible.
For markets: Investors have been getting in on the action.
“Institutional” investors might be more worried about “ESG crowding”. That’s where companies that have high ESG ratings – and are therefore bought up by ESG-focused funds – see their valuations rise thanks to increased demand. According to Goldman Sachs, such companies are 40% more expensive than the stock market as a whole. That might dissuade would-be investors, who may instead look for cheaper opportunities elsewhere.