Naoshi Ikeda: Does ESG Investing Yield High Returns?

2023/11/09

Recently, the term "ESG investing" has become increasingly common as a style of asset management. ESG stands for Environment, Social, and Governance. ESG investing refers to selecting and investing in companies that consider the environment and society and have established appropriate governance (corporate governance) systems. With the rise of ESG investing, companies are also taking ESG into account and actively communicating their initiatives.

Looking at information on the internet and elsewhere, it is often said that returns on ESG investing will be high because companies that engage in ESG-conscious activities improve their corporate value over the long term. At the same time, many point out that companies that consider ESG have lower risks.

However, can we really say that returns on ESG investing will be high? If everyone knew at this point that the value of ESG-conscious companies would improve over the long term, buy orders for these companies' stocks would already be flooding in. Therefore, the future improvement in corporate value due to ESG activities should already be factored into the current stock price, and the price should already be high. Since this means the stock price at the time of purchase is high, one cannot easily conclude that returns on ESG investing will be high. Furthermore, based on the principle of high-risk/high-return and low-risk/low-return, if ESG-conscious companies have lower risk, then returns on ESG investing would likely be lower instead. For these reasons, it actually seems quite difficult to argue that returns on ESG investing will be high.

Not only that, but it is also not easy to provide evidence that ESG-conscious activities improve corporate value. This is because even if a correlation is observed where companies with higher levels of ESG activity have higher corporate value, it is possible that companies with higher value and more resources are the ones actively engaging in ESG activities. The claim that ESG investing not only encourages ESG-conscious activities but also that these activities increase corporate value—and consequently, the returns on ESG investing—is very appealing. However, I feel it is necessary to organize the discussion calmly rather than accepting it at face value.