Investor Education
Fact Check: The Truth Behind Five ESG Myths
Fact Check: The Truth Behind 5 ESG Myths
In 2021, investors continue to embrace environmental, social, and governance (ESG) investments at record levels.
In the first quarter of 2021, global ESG fund inflows outpaced the last four consecutive quarters, reaching $2 trillion. But while ESG gains rapid momentum, the CFA Institute shows that 33% of professional investors surveyed feel they have insufficient knowledge for considering ESG issues.
To help investors understand this growing trend, this infographic from MSCI helps provide a fact check on five common ESG myths.
1. “ESG Comes at the Expense of Investment Performance”
Fact Check: Not necessarily
Worldwide, ESG-focused companies have not only seen higher returns, but stronger earnings growth and dividends.
Returns by ESG Ratings | Earnings Growth* | Active Return** | Dividends and Buybacks |
---|---|---|---|
Top tier | 2.89% | 1.31% | 0.28% |
Middle tier | 1.35% | 0.12% | -0.02% |
Bottom tier | -9.22% | -1.25% | -0.05% |
Source: MSCI ESG Research LLC (Dec, 2020)
*Contribution of earnings growth and dividends/buybacks to active return
**Active return is the additional gain or loss compared to it respective benchmark
In fact, a separate study from the CFA Institute shows that 35% of investment professionals invest in ESG to improve their financial returns.
2. “Investors Talk About ESG But Don’t Invest In It”
Fact Check: False
Global ESG assets under management (AUM) in ETFs have grown from $6 billion in 2015 to $150 billion in 2020. In just five years, ESG AUM have accelerated 25 times.
Today, money managers are focusing on the following top five issues:
Top ESG Issues | Assets Affected | Growth in Assets Affected (2018-2020) |
---|---|---|
Climate change / carbon emissions | $4.18T | 39% |
Anti-corruption | $2.44T | 10% |
Board issues | $2.39T | 66% |
Sustainable natural resources / agriculture | $2.38T | 81% |
Executive pay | $2.22T | 122% |
Source: US SIF Foundation (Nov, 2020)
Meanwhile, over 1,500 shareholder resolutions focused on ESG-related matters were filed between 2018-2020. Not only are investors turning to ESG assets, but they are placing higher demands on corporate responsibility.
3. “ESG Investment Strategies Eliminate Entire Sectors”
Fact Check: Not necessarily
First, not all ESG investment approaches are exclusionary.
For instance, in North America roughly 51% of ESG ETFs used an ESG integration approach as of Dec. 31, 2020. In an ESG integration approach, ESG risks and opportunities are analyzed with the goal to support long-term returns.
By comparison, values and screens approaches, which accounted for over 22% of ESG ETFs in North America may screen out specific business activities, such as alcohol or tobacco, or sectors such as oil & gas.
Percentage of ESG Type | Integration | Values & Screens | Thematic | Impact |
---|---|---|---|---|
North America | 50.9% | 22.5% | 20.7% | 5.9% |
Asia | 57.8% | 34.6% | 3.8% | 3.8% |
Europe | 30.8% | 60.6% | 8.6% | 0.0% |
Australia | 28.6% | 71.4% | 0.0% | 0.0% |
Source: Refinitiv/Lipper and MSCI ESG Research LLC as of Dec 31, 2020 (MSCI Feb, 2021)
Second, companies are assessed on a sector-specific basis where ESG leaders and laggards are identified within each sector in comparison to peers. In other words, ESG doesn’t mean eliminating exposure to entire sectors. Instead, investors can choose from a range of companies based on their ESG ratings quality.
4. “ESG Investing Is Only For Millennials”
Fact Check: False
Although ESG is popular among millennials, ESG investing is being driven by the entire investor population. In 2019, one study finds that 85% of the general population expressed interest in ESG investing.
Interest in Sustainable Investing | General Population | Millennials |
---|---|---|
2019 | 85% | 95% |
2015 | 71% | 84% |
Source: US SIF Foundation (Nov, 2020)
Sustainable investing goes far beyond millennials—ESG disclosures are quickly becoming requirements for key industry participants, such as institutional investors and listed companies.
5. “ESG Investing is Here to Stay”
Fact Check: True
Climbing 28% in 2020 alone, over 3,000 signatories have committed to the UN Principles of Responsible Investment. As of the first quarter of 2021, 313 global organizations and 33 asset owners have been newly added.
Growth of UN PRI | Number of Signatories* | AUM Represented |
---|---|---|
2020 | 3,038 | $103.4T |
2019 | 2,370 | $86.3T |
Source: UN PRI
*As of Mar, 2020
Central to ESG’s growth is the availability of ESG investments. ESG investing has become more widely accessible—which wasn’t always the case. Over the last decade, the global number of ESG ETFs has grown from 46 to 497.
Why the Facts Matter
As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact.
Given the recent momentum in investment returns and ESG adoption, data-driven evidence empowers investors to build more sustainable portfolios that better align with their investment objectives.
Investor Education
Visualized: A Step-by-Step Guide to Tax-Loss Harvesting
In Canada, tax-loss harvesting allows investors to turn losses into tax savings. This graphic breaks down how it works in four simple steps.
A Step-by-Step Guide to Tax-Loss Harvesting
Market ups and downs can be unnerving, but the good news is that tax-loss harvesting allows investors in Canada to capture tax savings when their portfolio drops in value.
While it sounds complicated, a tax-loss harvesting strategy is actually fairly straightforward. An investor can use capital losses to offset capital gains found elsewhere in their portfolio, leading to a lower tax bill. While there are important conditions to keep in mind, investors can use this strategy to enhance portfolio returns over time by reinvesting these tax savings.
This graphic from Fidelity Investments shows how tax-loss harvesting works and why it may improve tax efficiency in an investor’s portfolio.
Breaking It Down
Consider a person who invested $50,000 in a mutual fund held in a non-registered account that has dropped by $10,000 in value. To help minimize losses, they took the following steps in a tax-loss harvesting strategy.
For the sake of this example, taxes are based on the maximum federal rate and the average maximum provincial tax rate.
- Sold investment with a $10,000 loss
- Invested $40,000 into a different mutual fund
- Used the $10,000 capital loss to offset capital gains realized elsewhere in the non-registered portfolio
- Achieved up to $2,550 in tax savings
The investor realized as much as $2,550 in tax savings by utilizing a $10,000 loss against a $10,000 capital gain. Without tax-loss harvesting, this $10,000 capital gain would be taxed at a 50% capital gains inclusion rate ($10,000 X 50% = $5,000). This $5,000 in applicable gains is then taxed at a 51% combined federal and provincial tax rate ($5,000 X 51% = $2,550 in taxes owed).
In contrast, by using tax-loss harvesting, the investor would have achieved up to $2,550 in tax savings.
What’s more, you can reinvest your tax savings over each year—which may help boost portfolio returns over time if the new investment increases in value.
Tax-Loss Harvesting Tips
With a tax-loss harvesting strategy, here are some key tips and considerations to keep in mind:
- Investment Timeline: A capital loss can be used to offset capital gains not only in the current year, but in the three years prior and/or any year indefinitely in the future.
- New Investment Type: After selling an investment that’s dropped in value, it’s important to buy a different investment to avoid triggering the ‘superficial loss rule’. Investors can aim to choose an investment with similar long-term returns.
- Plan for Year-End: In order to achieve a capital loss, plan to sell an investment at least two to three days before the year’s final trading day so the investment settles before year-end.
Together, these tips can help investors strategically execute a tax-loss harvesting strategy.
Tax Made Easier
During volatile markets, investors can seize the opportunity to turn losses into tax savings using tax-loss harvesting as a key tool to help generate higher after-tax returns.
Explore Fidelity’s tax calculator to discover tax-saving opportunities.
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