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ESG doesn’t deserve non-diversification ‘stigma’

ESG doesn’t deserve non-diversification ‘stigma’

Reporter
— 1 minute read

The rise of environmental, social and governance (ESG) strategies and the shift away from strict negative screening has allowed socially responsible investment funds to become better diversified, says Eaton Vance.

Socially responsible investment (SRI) has “come a long way” in the past few decades, according to Eaton Vance equity portfolio manager Michael Allison.

“Initially, SRIs were largely used as a means to avoid controversial sectors, such as weapons, alcohol, tobacco, animal testing, abortion, coal or oil,” Mr Allison said.

“SRI investing earned a stigma – deserved or not – of delivering suboptimal investment returns due to complete avoidance of some industries.”

However, there has been a “shift in posture” in recent years away from negative screening, Mr Allison said.

“Rather than using SRIs as a means to avoid sectors, investors are now more commonly using them to support companies that align with their beliefs.”

“Today, the most popular ESG investments are green funds, which prioritise companies that are environmentally friendly relative to their peers. Another common ESG focus is on companies that promote gender equality.

“With the rise of ESG investments, investors may be able to gain more diversification than SRI funds enjoyed historically,” Mr Allison said.

“Companies that focus on sustainability and impact management have historically shown the ability to create a stronger long-term enterprise. Thus, the distinction between traditional SRI and ESG investments is very important.”

Given the increased popularity of ESG strategies, SRI fund performance is “not deserving” of the stigma that is attached to it, Mr Allison said.

“Investors may benefit from a professional manager who can select companies creating a stronger long-term enterprise through ESG practices.”

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ESG doesn’t deserve non-diversification ‘stigma’
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