Flexibility Can Help Resolve ROI Issues in ESG Investing

Environment, social and governance (“ESG”) projects are becoming increasingly popular among investors, corporations and governments globally. With the effects of human-induced climate change becoming clearer by the day, there is a growing need for increased accountability in ESG reporting among corporations and governments because they are typically responsible for the majority of the world’s emissions.

Trillions of dollars are being earmarked for such ESG projects, and PriceWaterhouseCoopers forecasts that investment in ESG projects will almost double from $18.4 trillion in 2021 to nearly $34 trillion in 2026. ESG holdings are also on track to account for 21.5% of all the world’s managed assets in only two years, thanks to increased corporate, government and investor adoption of environment, social and governance projects.

Despite popularity and the hype around ESG, some experts wonder whether ESG investing provides investors with a good return on investment (“ROI”) or is an efficient means of protecting and preserving the environment. According to these experts, investing in ESG has a high chance of diminishing returns.

In the United States, for example, the discussion around ESG considerations and investing has turned political and become increasingly toxic. Some GOP-led states have even begun to push back against the Biden administration’s preference for retirement fund rules that favor ESG concepts.

Large asset managers such as BlackRock, Street Global Advisors and JP Morgan are also reconsidering their ESG policies. Both JP Morgan and Street Global Advisors left the Climate Action 100+ group while BlackRock exited as a corporate member and transferred all its participation to a smaller subsidiary.

BlackRock is largely responsible for pushing ESG in the investment and asset management space, advising investors to consider ESG practices before investing in companies. Blackrock CEO Larry Fink says that he won’t use the term ESG anymore because it has been co-opted by members of the far left and far right.

However, despite the political issues and general skepticism surrounding ESG investing, it can still allow investors to earn a respectable return on income if it is more flexible. Typical ESG investment strategies involve classifying companies into green (environmentally friendly) and brown (environmentally harmful) companies. Although the idea is to drive investment in green firms, this strategy often increases the cost of “green assets” and reduces their return on investment.

Creating a return gap between green and brown companies could increase the ROI for investors who buy green assets. This would require flexible demand for capital, which would in turn shift investment from brown companies to green ones without causing a drastic effect on the return gap.

It would be interesting to hear how companies that have, on their own volition, embraced ESG principles, such as Prospera Energy Inc. (TSX.V: PEI) (OTC: GXRFF) (FRA: OF6B), are faring in terms of seeing ROI on their investment.

NOTE TO INVESTORS: The latest news and updates relating to Prospera Energy Inc. (TSX.V: PEI) (OTC: GXRFF) (FRA: OF6B) are available in the company’s newsroom at https://ibn.fm/GXRFF

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