2. ESG may mean sacrificing returns: lower returns or higher risk
When you limit your investment options and pay more to include your ESG factors, you may give up on some investment return as you narrow the field that can provide you with returns. Many have written on why this kind of sustainable investing can feel like a money pit because the funds you favor can underperform compared to others that are less socially responsible and perhaps less risky, too.
Take time to do your ESG research and find companies that not only align with your values, but have the best returns, as there may now be more than one option to choose from if you spend time researching upfront before you invest.
3. Slightly higher fees
You may have to pay a little more in management fees for some ESG funds, which can also eat into your earnings. That’s because ESG funds require managers to do research and they’re often working with a smaller asset base, so you may pay more to be in their funds.
But, as one study showed, 66% of people around the globe are willing to pay more for sustainable goods. That number jumped to 73% with millennials. It’s always smart to focus on performance, but if you’re doing your research, you may discount the extra cost knowing that you’re investing in a higher cause.
4. No reporting requirements
While there are different analytic firms that can rate stocks on the socially responsible scale, the biggest pitfall these days in the ESG investment process is that there are no standards or ESG ratings to measure these funds’ performance. So, they can market themselves as good for the environment, but they may not be, and if you start comparing companies, it may feel like apples and oranges. You don’t have a way to tell because there are no reporting requirements and what is self-reported isn’t consistent across industries or companies since there is no universal standard.
