Over the last decade, investors have expressed increasing interest in impact investing, which is also called ESG investing. While the terms keep changing — from socially responsible investing to sustainable investing to ethical investing — the overall idea remains the same. And criticism is rising.
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Many investors want to adopt a strategy that weighs both financial returns and societal factors. If their portfolio can reflect environmental or social priorities, they are more apt to feel good about making money.
But as more people favor stocks that have high ESG (environmental, social and governance) scores, skeptics have taken notice. Some politicians and industry observers argue that ESG investing may not be consistent with an advisor’s fiduciary duty to work in the client’s best interest.
The ESG Investing Debate
ESG proponents claim that all companies, by their very nature, exert influence on social and environmental issues. So it’s prudent for any portfolio manager to consider risk, return and impact when assessing investment opportunities.
Others note that federal law requires fiduciaries that manage ERISA-covered pension and retirement accounts to focus only on risk and return — not impact. Labor Department rulings in 2020 and 2022 have embodied clashing views of ESG investing, and some critics of the latest ruling — that a fiduciary “may” rely on ESG factors — claim it encourages “woke” investing.
Where does all this leave advisors who field…
