What is ESG investing? Does it work?

ESG refers to the Environmental, Social and Corporate Governance. ESG investors often evaluate companies solely on a range of ESG metrics, and allocate capital to companies with "high ESG scores". Over the last few years, "ESG funds" have outperformed "non-ESG" ones. Consequently, they have gained popularity, with ESG-focussed asset managers receiving record inflows of capital in 2018, and Q1 2019.

I have attended two lectures - one at Columbia University, and another at Yale - about ESG investing in order to understand the reasons for its rise. I frequently hear people saying that being ESG-investing generates better returns. I partly disagree with this statement.

Just because you invest based on ESG scores does not mean you will necessarily generate better returns; ultimately, all that counts is that you buy businesses for less than they are worth. That being said, I do not believe that an evaluation of a company's ESG standards is futile. Indeed, I advocate considering how a company thinks of Corporate Social and Environmental Responsibility; a company which is fulfilling its responsibility to its employees, and attempting to reduce the negative effects of its operation is likely to be better managed. And, a better management is likely to create more long-term value for shareholders.

Thus, I wish to suggest that ESG should be one of many factors that drives a capital allocation decision. Having tweaked the layman's definition of "ESG investing", I can say that there is no such thing as ESG vs. non-ESG investing: all investors must consider ESG standards when evaluating a company.