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Is ESG Investing the Financial Future?

The American College of Financial Services
October 12, 2020

In the age of COVID-19, economic and market uncertainty have led many financial advisors and investors to redefine their wealth management strategies. While some turn to more secure and protected assets to weather the storm, others counsel patience and perhaps even a bit of risk to avoid locking in losses long term. But one field of investments is emerging from the turmoil as a potentially high-performing option for investors: ESG (Environmental, Social, and Governance) investing. An ESG portfolio looks to reap the potential of high returns while combining it with principle to support the financial goals and life mission of the investor. So why are ESG investments so popular right now?

During the massive market downturn in the first quarter of 2020 due to the onset of the pandemic, ESG funds outperformed the overall equity market by wide margins, indicating their potential strength in a portfolio. While many still reported losses, they were much lower than those of the broader market and their peer funds. One factor could be that ESG funds avoid investments in oil, gas, and other fossil fuels: this is mostly due to the social responsibility principles ESG investors tend to practice, but during COVID-19 it became an asset as oil prices hit lows unseen in decades. The point of ESG investing is to consider long term impacts of financial, social, and ethical practices, and as fossil fuels are generally agreed to have a negative impact on the environment, they could be seen as liabilities. 

Another factor could be the issues that are top of mind for many Americans during the pandemic, including labor relations, corporate governance, and unemployment. With many businesses' financial future uncertain, furloughs and executive pay have become hot-button topics: since these basic workplace fairness matters are ESG-related, investors and financial advisors may have naturally gravitated toward ESG investing for the resilience, sustainability, and long term planning aspects of its strategy.

Some financial advisors question how viable ESG investing will be in the long term. This is a question that remains unanswered based on how companies, both those involved in ESG-related matters like renewable fuels and those following more standard business models, adapt, grow, and treat their employees. However, in many European countries and even worldwide asset management companies, officials are putting guidelines in place to encourage and promote ESG investing and place sustainability at the front and center of wealth management strategies.


Financial planning for the future


When financial advisors consider the ever-growing importance of retirement planning, tax planning, and portfolio resilience, the potential value of ESG investing needs to be taken into consideration as part of conversations with clients about financial goals. Our latest article, "Riding the Wave: The Pandemic Drives Growth in ESG Investing," can help. Download now to learn how you can combine principle with portfolio profitability, and visit TheAmericanCollege.edu/WMCP for a look at how we're redefining wealth management strategies for the 21st century.

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