What is Sustainable Stock Investing?

ESG/ sustainable investing is a form of investing that is generally viewed as socially responsible. It should focus on the company’s financial return together with the impact of the company’s action on the environment and stakeholders.

ESG stands for Environmental, Social, and Governance. Which are the common three criteria to evaluate a company’s sustainability.

Environmental can means how a company’s action is related to say, Carbon footprint, renewable energy usage, or Greenhouse gas.

Social can means how a company’s action is related to say, how a company treats their employees, employees’ safety policies, and employee diversity and inclusion in hiring, promotions, and compensations.

Governance can mean how a company’s action is related to say, the diversity of the board and management team, separation of the Chairman and CEO roles, and also policies to enforce ethical business practices.

Companies that commit themselves to ESG usually will report their ESG initiatives plus the progress against their goals. It can be in a form of sustainability reports established by the Global Reporting Initiative.

Does Sustainable Stock Investing Works?

In September 2021, Prof Aswath Damodaran, a widely respected New York University finance professor said that ESG investing is “not just a mistake that will cost companies and investors money while making the world worse off, but that it create more harm than good for society.”

In Morningstar, their view is that Prof Damodaran raises some good points but he’s mostly wrong on his key assumption.

Morningstar’s view is that good ESG investing attempts to improve equity valuation and account for the risks posed to businesses from climate change and human resource regulations.

While Damodaran’s view is that sustainable investing is that measuring “Goodness” is not easy to measure. And in ESG/sustainable investing, we need to come up with some measures of “goodness” that can be targeted by corporate managers and used by investors.

My view is that investing sustainably is important and it requires us to have a holistic point of view of the ESG factor ultimately for the business longevity and the sustainability of society.

What’s your view?

Warren Buffett View on ESG Investing

Warren Buffett is not a big fan of ESG and he noted that most ESG requests he received came not from shareholders, but from third-party organizations.

In Berkshire, they do not like reporting just for the sake of it. And Buffett thinks ESG reporting falls under this umbrella.

Although Buffett has passed on tobacco investments in the past due to ethical concerns, they are comfortable investing in oil and gas companies.

In short, Warren Buffett does not seem to be a big fan of ESG reporting.

In Conclusion

For me, I am a firm believer in sustainable investing. And in investing with a purpose for the good of society.

But I am aware that that can only be done if the business also prospers and if the business prospers first.

So I think that while companies should not ignore the ESG part for sustainable investing, they have to ensure that they are focusing on ESG because they want the business to last a long time – and grow for a long time. 

There is no point to focus on ESG but the business suffers over the long term. 

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