By Eric Dutram, Assistant Vice President, DWS.

Eric Dutram, Assistant Vice President, DWS.

Though environmental, social, and governance (ESG) investing has entered the mainstream, it remains a neglected topic for many. Some still believe that the strategy is a passing trend – the flavor of the month in investing that might feel good, but at the cost of an unbalanced portfolio and possibly even lower returns as well.

Fortunately for ESG investors, these are all myths about responsible investing.

Why some falsehoods remain regarding ESG remains a mystery. It may be that many are looking to preserve the status quo, or it could just be broad skepticism. Either way, we’d like to set the record straight on five of the most common, and we’d say unfounded, myths we still hear regarding ESG investing.

• ESG is just a niche strategy

Some investors dismiss ESG as a fad. They believe that since the majority of portfolios pay no heed to these factors, why should they?

But for a niche strategy, ESG sure has a lot of interest. Over a quarter trillion dollars is invested in ESG across the US, while the number of funds with this approach has tripled in the past 15 years. For a passing trend, it sure has a durable growth story over the past 20 years.

Source: DWS.

• ESG is just for environmentalists

For some, ESG and sustainable investing are likely tied to the concept of environmental issues. This may be because the environment is relatively clear cut – measuring carbon emissions or water usage are straightforward – or because environmental issues are so front-and-center in today’s world.

But either way, it forgets what may be the most universal of all the factors, governance, which is the “G” in ESG. This metric looks at items such as business ethics, corruption, and board pay policies. These are concepts that most investors can get behind, regardless of their stance on climate change or the environment.

In other words, ESG should be thought of as a broad risk discovery tool. You do not need to be an environmentalist to appreciate that.

• Implementing an ESG portfolio is going to be expensive

Many times in the investing world, the more involved the strategy, the greater the perceived cost to implement it. And with some ESG strategies looking at dozens of factors, it might be assumed that the cost is extreme when compared to index funds. However, that may not be the case anymore.

While it is true that ESG strategies will generally cost more than index funds, the current crop of ESG funds is highly competitive on a cost front. In fact, some ESG ETFs today are within 10 basis points of their “regular” peers, while each major investing region of the globe – US, EAFE, and emerging markets – has an ESG option that can be had for 20 basis points a year or less. Responsible investing doesn’t have to be pricey anymore.

• ESG will put me overweight (and underweight) certain sectors

A major fear of potential ESG investors is that an environmental and social approach will leave portfolios underweight sectors such as energy, materials, and others. This is because companies with environmental issues tend to be in these areas more than, say, technology – potentially threating to leave a portfolio lopsided relative to more “standard” benchmarks.

That is why the process is so important. Some, such as MSCI, utilize a system which targets the highest ESG-rated companies by sector, helping to maintain sector neutrality. That way, investors still get market like exposure, but without some of the worst offenders from an ESG perspective.

• I’ll have to sacrifice returns

Arguably, the most pervasive and damaging myth of all is in regards to performance. Many assume that doing good can only come at a cost, that an ESG compliant portfolio will underperform a traditional counterpart.

Recent research suggests otherwise. Not only have companies with high ESG ratings generally posted lower earnings volatility, but companies with robust sustainability practices have demonstrated better operational performance. If that wasn’t enough, 90% of study results showed a positive link between sustainability and investment performance, suggesting worries over a likely lower return are largely unfounded.

Source: DWS.

Bottom line

After taking a closer look at some of the main myths, a clearer picture of what ESG investing can possibly do to support an investment portfolio has hopefully come to light. Concerns over outsized costs, negative performance, and implementation appear to be unfounded, and it seems as though more investors are beginning to appreciate the real story behind responsible investing.

In fact, many are already starting to embrace ESG principles for not only their investments but general day-to-day life as well. In the coming series on ESG, we will take a closer look at a variety of examples of how the world is moving towards a more responsible future, including how this trend is finding its way into endowments, governments, and corporations. The series is just a small subset of the growing movement though; the key takeaway is that ESG is here to stay and it may not be a choice any longer.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)