Environmental, social, and governance: what is ESG investing?

Companies in ESG funds meet higher standards in respect to the environment and society

Today's expression: Nagging doubt
Explore more: Lesson #509
October 6, 2022:

ESG stands for “environmental, social, and governance,” and ESG investing is a way to funnel your investments toward companies that meet higher standards in these three categories. Not only that, but sponsors of these funds promise that ESG funds will make the same return, or an even better return, in the long run. Plus, learn “nagging doubt.”

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On today’s Plain English: ESG and a friendlier kind of investing

Lesson summary

Hi there everyone, I’m Jeff, JR is the producer, and you are listening to Plain English, the best way to upgrade your English with current events and trending topics. By listening here every week, you’ll get exposure to lots of new concepts in English, lots of expressions, new vocabulary words, things like that…and hopefully you’ll have fun in the process.

This is lesson number 509, which you can find at PlainEnglish.com/509.

Coming up today: ESG stands for “environmental, social, and governance.” It’s a way of directing your stock investments toward companies that, generally, act responsibly toward the environment and society as a whole.

In the second half of the lesson, you’ll learn how to use the English expression “nagging doubt.” And JR has a song of the week. Let’s get going.

ESG investing steers funds to companies that do good

Imagine you have saved some money for the future and, instead of putting it in a savings account, you decide to invest it in the stock market, buying a few diversified index funds of global stocks. An index fund is convenient: you buy as much or as little as you want. The fund invests a little bit in hundreds or thousands of companies, so you get nice broad exposure to the market without having to do much legwork.

And imagine that over the years, you check the value of your portfolio of index funds. While it’s had its ups and downs, the portfolio is making you a nice return, far better than you could get in a bank.

You feel good about your decision, but you have a few nagging doubts. One of your index funds includes a lot of ExxonMobil stock, and you don’t believe that ExxonMobil is doing enough to avoid the damaging effects of climate change, at least not like some energy companies in Europe.

And you also notice that, at least for a while, the index funds included stock in Wirecard, a German company that blew up after an accounting scandal—something that could have been prevented if they had better controls, not to mention stronger ethics.

And you see, too, that your index funds also include gunmaker Smith & Wesson. You remember hearing the company opposed gun laws in the United States after a mass shooting at a school.

So you look again at your portfolio value, and you’re happy with the number, but maybe you’re not so happy about how you got there. Isn’t there a way to make a good return without investing in companies that do things you don’t believe in?

Enter “ESG investing.” ESG stands for “environmental, social, and governance.” The idea is that investors—including mutual funds and index funds—can choose to invest in companies that act responsibly with respect to the environment and society at large, and which have good management controls.

The idea is, not all companies, and not all profitable companies, are equal in their impact on the wider world. In the past, maybe it was enough for investors to care about dividends and future profits. But in a more enlightened version of capitalism, investors should choose to steer their funds toward companies that do a broader range of good. This idea has caught on in about the last five years.

What, though, do ESG investors care about? Let’s take E, S, and G in turn. Environmental concerns look like this: what are the company’s greenhouse gas emissions? How much energy does it use? How much waste does it produce? How much water does it use in its processes? These questions are about a company’s impact on “E,” the environment.

Now let’s turn to the “S” in ESG. Does a company pay women and men equal amounts for the same work? Does top management include racial and ethnic minorities? Are women represented at the top? What is the company’s safety record?

And finally, “G” stands for governance. Does a company have processes and systems in place to protect it? Have there been data breaches? How well does a company guard sensitive customer information? Does the company practice good ethics?

Most individual investors don’t have the time or ability to ask these questions directly of companies, so special ESG analysts do the work for them. Using publicly-available data and interviews with management, ESG analysts produce “scorecards” that evaluate companies on a range of ESG metrics.

That way, individual investors can read those reports and decide where to direct their investments. But even that, realistically, is more work than individual investors can do. So mutual fund companies and index fund sponsors have introduced ESG funds.

Instead of including all companies in a given industry or index, these ESG funds only include those companies that meet certain ESG criteria. That way, buyers of the ESG index funds can rest assured that their investments won’t go to companies that don’t act responsibly.

Not only that, but sponsors of these funds promise that ESG funds will make the same return, or even a better return, because high-scoring ESG companies are stronger companies in the long run.

So individual investors can buy an ESG fund, only invest in responsible companies, not have to do much work, and still make a better return than a traditional index fund approach.

It is a tantalizing prospect. But the whole idea is built on a weak foundation. Next week, we’ll talk about why 2022 will be remembered as the year in which the cracks in the ESG foundation began to show.

Live calls

If you watched the 500th lesson video, you might have remembered a couple of your fellow listeners said their favorite part of Plain English Plus+ is the live calls. And so I thought I’d take just a moment to share what our live calls are typically like.

We do them on Zoom and they start at all different times, so that everyone can join during waking hours. They’re about an hour each and we have a nice discussion about a recent Plain English topic.

One of our favorite call topics was about Google Maps. So you remember we talked about all the features in Google Maps in Lesson 477. Well, after that, we had a live call where the individual members gave us a Google Maps tour of their hometowns.

So we have multiple topics each month, they’re on Zoom, and the links are sent out in advance to all Plus+ members. If that sounds like something you can use in your English studies, then come check out the Plus membership at PlainEnglish.com/Plus.

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Expression: Nagging doubt