The effort to make socially responsible investment and capitalism compatible

Northern Trust, an early adopter, has seen its sustainability-related assets double over the past four years to around 13% of its $1.2 trillion in assets under management. Assets managed by ESG are growing at an annual rate of 30%, says Sheri Hawkins, executive vice president and global head of product management at Northern Trust Asset Management. “It’s front and center for our investors,” Hawkins says.

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ESG investing is often misunderstood because it is defined so broadly. The approach may involve eliminating oil and gas companies and other greenhouse gas emitters and adopting clean energy alternatives. Many asset owners invest in designated ESG funds, but these also have a lot of leeway. Some ESG investors hold fossil fuel holdings, primarily through index funds, and engage with management to encourage them to reduce their carbon footprint.

One concern is “greenwashing,” the fear that fund managers make misleading or unsubstantiated claims about the sustainability features and benefits of their investment products. Investors may be disappointed to find that the funds they have selected do not offer the features or benefits they expected.

And critics say that private sector efforts will never be enough to stem climate change and that investing in ESG funds only makes investors complacent. It’s “like selling wheatgrass to a cancer patient,” wrote Tariq Fancy, the former head of sustainable investing at BlackRock, in a series of recent essays.

Funds need to be clear about the kinds of results they seek for investors, wrote Jon Hale, global head of sustainability research at Morningstar, in a recent essay. “None is claiming that it will save the world. These are, after all, investments.”

Push bad actors

ESG dates back to the days of the Vietnam War, when it was called “socially responsible investing”. Shareholders voted against the production of napalm and Agent Orange and then argued for divestment from South Africa because of its apartheid system of racial segregation.

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