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The Securities and Exchange Commission (SEC) defines ESG investing as “the types of risks and investment styles we describe with the broad term “ESG” in this document include environmental, social and governance practices; sustainability; impact investing; responsible investing, and other similar terms.”
ESG investing has grown significantly in recent years; according to the ICI, “socially conscious” registered investment products grew from 376 products/$254 billion in assets under management at the end of 2017 to 1,102 products/$1.682 trillion in AUM by the end of June 2020.”
The subcommittee finds that ESG investment products are not significantly different than other types of products, with the following exceptions: There is less available public data to support measurement and validation of ESG risk factors than exists for many traditional products; ESG products have risk/return objectives that could reflect a longer time horizon than traditional products; and ESG products may have objectives that fall outside risk/return objectives alone.
The U.S. Department of Labor (DOL) offers a 100-page document (Environmental, Social, and Governance (ESG) Investment Tools: A Review of the Current Field) with information about and estimating of the risks involved with ESG investing. The DOL has particular interest in this field because one of the DOL’s responsibilities is to protect Americans’ retirement investments.
Other Terms Used Interchangeably with ESG:
Sustainable Investing (SI)—the full integration of ESG factors into financial analysis and decision-making
Responsible Investing (RI)—an approach that aims to incorporate ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns
Socially responsible investing (SRI)—an investment approach that aims to simultaneously achieve environmental and social goals, as well as financial goals
“U.S. Securities and Exchange Commission Asset Management Advisory Committee Potential Recommendations of ESG Subcommittee” (December 2020)
“ESG Investing Comes of Age” by Jess Liu of Morningstar (June 2020)
“What Is ESG Investing?” by ADEC Innovations (2020)
“What Is ESG Investing?” by Alyce Lomax of Motley Fool (October 2020)
“3 Steps to a Socially Conscious Portfolio” by Ron Lieber of the NYTimes (February 2020)