Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Heeding Rankings on Esg Investing Can Yield High Returns

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Heeding Rankings on Esg Investing Can Yield High Returns

Article excerpt

The investment approach has various labels, including "sustainable," "responsible" and "ethical" investing. Or, it is known as ESG investing, where conventional investment analysis is combined with a company's environmental, social and governance practices.

Regardless of the label assigned, it means investing with an emphasis on companies with managements that are progressive with respect to making useful products and minimizing the harmful environmental consequences of the business operations, fostering positive employee and community relations, and practicing high ethical standards. A growing number of pension and endowment funds have embraced sustainable investing.

It's easy to see why. First, investing in progressive companies has the effect of reducing risk without sacrificing returns, and it is often consistent with the missions of such funds. Companies that are progressively managed relative to their competitors have less risk of legal or regulatory problems or resource scarcity, and they have greater business opportunities.

Such companies are simply managed better, and they deserve higher valuations in the stock market. Their stocks also have produced superior returns to market indexes, and even greater returns compared to their competitors who are rated poorly on ESG measures. These better-managed companies are more "sustainable," in that they are more likely not only to survive over time, but to excel relative to competitors.

There are, however, challenges in taking a sustainable investing approach. It is difficult to assign a rating or ranking to large enterprises that operate in various industries with operations around the world.

Some regions or business divisions may have exemplary records, while others within the same company might not. Many companies, for example, operate in industries that have harmful environmental effects, such as mining or energy. How much emphasis should be given to managements' good intentions at improvements on ESG measures and how much to the actual effects of the operation of the business?

For these reasons, for the largest global companies, there are varied rankings on ESG measures for the same company, depending on the firm that has done the analysis. …

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