In some cases, the differences between ESG funds and their less socially responsible counterparts isn’t exactly glaring.Many investors would like to invest ethically. The problem is defining exactly what “ethical” means.
No wonder investors are confused. “You really need to do some serious homework about any approach you’re interested in,” says Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto. “Different ESG approaches vary in what they choose to look at, how they measure things, and how they weight the results.”
Ethical funds have already demonstrated they can produce returns that are just as good as conventional investments, according to Tim Nash, founder of Good Investing , a financial-planning firm in Toronto that coaches people on how to invest in line with their moral principles. Since 2007, for instance, the iShares Jantzi Social Index ETF has achieved results that are next to indistinguishable from the plain-vanilla S&P/TSX 60, the benchmark for large Canadian stocks.
A recent study from researchers at the Massachusetts Institute of Technology and the University of Zurich compared ESG scores from five rating agencies and found they frequently diverged in significant ways. “Raters disagree both on the extent of the definition of ESG, as much as they disagree on how the various aspects of ESG are measured,” according to the study, titled Aggregate Confusion: The Divergence of ESG Ratings.