NEW YORK (AP) — After sweeping through battles in statehouses across the country, the war against ESG investing is heating up in Congress.
The Senate voted Wednesday to overturn a Labor Department rule allowing retirement plans to consider environmental, social and governance factors when making investment decisions, following a similar vote by House Republicans on Tuesday. It sets the stage for a potential first veto by President Joe Biden.
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. They say ESG is just the latest example of the world trying to get “woke.”
The ESG industry, meanwhile, says it helps highlight companies that may be riskier than traditional investing guidelines alone might suggest. That could lead to more stable, safer returns for savers. It also says using an ESG lens could help investors find better, more profitable opportunities.
ESG has become popular across a wide range of investors, from smaller-pocketed regular people to pension funds responsible for the retirements of millions of workers.
WHAT IS ESG?
It’s an acronym, with each of the letters describing an additional lens that some investors use to decide whether a particular stock or bond looks like a good buy.
Before risking their money, all investors including both traditional and ESG ones look at how much revenue a company is bringing in, how much profit it’s making and what the prospects are for the future.
ESG investors then layer on a few more specific considerations.
Mary Altaffer
File - Visitors to the financial district walk past the New York Stock Exchange, Friday, Sept. 23, 2022, in New York. After sweeping through battles in statehouses across the country, the war against what's called ESG investing is heating up in Congress. (AP Photo/Mary Altaffer, File)
WHAT IS E?
Environment. It can pay to avoid companies with poor records on the environment, the thinking goes, because they may be at greater risk of big fines from regulators. Or their businesses could be at particular risk of getting upended by future government attempts to protect the environment.
Such risks may not be as appreciated by those using just traditional investment analysis, which could lead to too-high stock prices, ESG advocates say. That in turn would mean too-high risk.
On the flip side, measuring a company’s environmental awareness could also unearth companies that could be better positioned for the future. Companies that care about climate change may be better prepared for its repercussions, whether that means potential flooding damage at factory sites or the risks of increased wildfires.
WHAT IS S?
Social. This is a wide-ranging category that focuses on a company’s relationships with people, both within it and outside.
Investors measuring a company’s social impact often look at whether pay is fair and working conditions are good through the rank and file, for example, because that can lead to better retention of employees, lower turnover costs and ultimately better profits.
Others consider a company’s record on data protection and privacy, where lax protocols could lead to leaks that drive customers away.
Increasingly, companies are also getting called upon to take positions on big social issues, such as abortion or the Black Lives Matter movement. Some ESG investors encourage this, saying companies’ employees and customers want to hear it.
Not every ESG investor considers all these factors, but they all get lumped in together under the “S” umbrella.
WHAT IS G?
Governance, which essentially means the company is running itself well.
That includes tying executives’ pay to the company’s performance, whether that’s defined by the stock price, profits or something else, and having strong, independent directors on the board to act as a powerful check on CEOs.
HOW BIG OF A DEAL IS ESG?
Investors who use one or more ESG criteria or push companies on such issues as a group controlled $8.4 trillion in U.S.-domiciled assets in 2022. That’s according to the most recent count by US SIF, a trade group representing the sustainable and responsible investing industry.
That’s enough money to buy Tesla, one of the most valuable U.S. stocks, more than 11 times over. It also means ESG accounted for $1 of every $8 in all U.S. assets under professional management.
With stock and bond markets tumbling last year, the flow of dollars into ESG funds has slowed since setting a peak in early 2021. U.S. sustainable funds pulled in a net $3 billion over the course of 2022, according to Morningstar.
Not only have sharp drops for all kinds of investment prices raised worries, so has the increased political backlash. During the final three months of 2022, which was a particularly tough period for financial markets, investors pulled nearly $6.2 billion more out of sustainable funds than they put in, according to Morningstar.
Still, despite the slowdown, demand is still higher for sustainable funds than for their traditional peers.
IS IT JUST MILLENNIALS DOING IT?
No, the vast majority of money in ESG investments comes from huge investors like pension funds, insurance companies, endowments at universities and foundations and other big institutional investors.
WHAT IMPACT IS IT HAVING?
ESG investors are pushing for more engagement with companies, discussing their concerns about the environment, social issues and governance. They’re also casting their votes at annual shareholder meetings with ESG issues more in mind.
In 2021 a relatively small fund known as Engine No. 1 shocked corporate America after it convinced some of Wall Street’s biggest investment firms to approve its proposal to replace three directors on Exxon Mobil’s board, citing a decarbonizing world.
Investors are also pushing executives across corporate America to give more details about their carbon emissions, measurements about their impacts on human rights and audits for racial equity.
It’s all an evolution from the industry’s early days, when “socially responsible” investing was quite simplistic. Early funds would just promise not to own stocks of tobacco companies, gun makers, or other companies seen as distasteful.
AND THE BACKLASH?
Some politicians have denounced ESG as a politicization of investing.
Some in the business world also have been particularly critical of rating agencies that try to boil complex issues down to simple ESG scores.
Tesla CEO Elon Musk last year called ESG a scam that “has been weaponized by phony social justice warriors,” for example. His criticism came shortly after Tesla got kicked out of the S&P 500 ESG index.
The index tries to hold only companies with better ESG scores within each industry, while holding similar amounts of energy stocks, tech stocks and other sectors as the broader S&P 500 index. That means Exxon Mobil could remain in the S&P 500 ESG index, even if it’s pulling fossil fuels from the ground to burn, because it rates better than peer energy companies.
ARE THOSE THE ONLY CONTROVERSIES?
No. Any boom brings in opportunists, and regulators have warned of some potentially misleading statements.
That could include firms claiming to be ESG-driven but owning shares in companies with low ESG scores. It’s reminiscent of how products along supermarket aisles get accused of “greenwashing,” or pitching their wares as “green” even if they’re not.
Part of that could be how big the ESG industry has become, with some players taking a lighter touch.
Some funds pledge not to own stocks of any companies seen as dangerous, for example. Others will try to own only companies that get the highest ratings from scorekeepers on ESG issues. Still others try to buy only companies that score the best within their specific industry, even if the score is very low overall.
Such nuance can make for confusion among investors trying to find the right ESG fund for them.
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What is ESG investing and why do some hate it so much?
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High-net-worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate. There were 24.5 million millionaires in the U.S. in 2022—and only 21% of them inherited money.Â
When it comes to how they safeguard their financial wellbeing, millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios. More than one of these types of investments can be combined in comprehensive strategies with the aim to build wealth.
To learn how to invest like a millionaire, SmartAsset compiled a list of places where the genuinely rich keep—and grow—their money.
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High-net-worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate. There were 24.5 million millionaires in the U.S. in 2022—and only 21% of them inherited money.Â
When it comes to how they safeguard their financial wellbeing, millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios. More than one of these types of investments can be combined in comprehensive strategies with the aim to build wealth.
To learn how to invest like a millionaire, SmartAsset compiled a list of places where the genuinely rich keep—and grow—their money.
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What is ESG investing and why do some hate it so much?
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Many, and perhaps most, millionaires are frugal. If they spent their money, they would not have any to increase wealth. They spend on necessities and some luxuries, but they save and expect their entire families to do the same. Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments. Millionaires also bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller's window.
Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolios. Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills.
Some millionaires keep their cash in Treasury bills. They keep rolling them over to reinvest them, and liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money and can usually get purchased at a discount. When you sell them, the difference between the face value and selling price is your profit. Warren Buffett, CEO of Berkshire Hathaway, has a portfolio full of money market accounts and Treasury bills.
Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and they write checks on their zero-balance account. At the end of the business day, the private bank, as custodian of their various accounts, sells off enough liquid assets to settle up for that day. Millionaires don't worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank.
Other millionaires have safe deposit boxes full of cash denominated in many different currencies. These safe deposit boxes are located all over the world and each currency is typically held in a country where transactions are conducted using that currency.
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Many, and perhaps most, millionaires are frugal. If they spent their money, they would not have any to increase wealth. They spend on necessities and some luxuries, but they save and expect their entire families to do the same. Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments. Millionaires also bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller's window.
Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolios. Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills.
Some millionaires keep their cash in Treasury bills. They keep rolling them over to reinvest them, and liquidate them when they need the cash. Treasury bills are short-term notes issued by the U.S government to raise money and can usually get purchased at a discount. When you sell them, the difference between the face value and selling price is your profit. Warren Buffett, CEO of Berkshire Hathaway, has a portfolio full of money market accounts and Treasury bills.
Millionaires also have zero-balance accounts with private banks. They leave their money in cash and cash equivalents and they write checks on their zero-balance account. At the end of the business day, the private bank, as custodian of their various accounts, sells off enough liquid assets to settle up for that day. Millionaires don't worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank.
Other millionaires have safe deposit boxes full of cash denominated in many different currencies. These safe deposit boxes are located all over the world and each currency is typically held in a country where transactions are conducted using that currency.
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What is ESG investing and why do some hate it so much?
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Real estate investments are another common way for millionaires to invest their wealth. Typically, many make their first real estate investment in a primary home and then buy additional residences, usually for tenants. After buying some personal real estate, others also start buying commercial real estate like office buildings, hotels, stadiums, bridges and more.
Millionaires often have large real estate portfolios. Once they have established themselves as a buyer in the real estate market, real estate agents start bringing them deals and they can find it easy to obtain financing. Large investors have many millions tied up in real estate. Real estate may not be an immediate investment to depend on for cash, but it can be lucrative in the long run, and a tried and true investment for millionaires seeking passive income.
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Real estate investments are another common way for millionaires to invest their wealth. Typically, many make their first real estate investment in a primary home and then buy additional residences, usually for tenants. After buying some personal real estate, others also start buying commercial real estate like office buildings, hotels, stadiums, bridges and more.
Millionaires often have large real estate portfolios. Once they have established themselves as a buyer in the real estate market, real estate agents start bringing them deals and they can find it easy to obtain financing. Large investors have many millions tied up in real estate. Real estate may not be an immediate investment to depend on for cash, but it can be lucrative in the long run, and a tried and true investment for millionaires seeking passive income.
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What is ESG investing and why do some hate it so much?
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Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They seek passive income from equity securities just like they do from the passive rental income that real estate provides. These millionaires simply don't want to spend their time managing investments.
Ultra-rich investors may also hold a controlling interest in one or more major companies. But, many millionaires hold a portfolio of only a few equity securities. For these ultra-rich investors, index funds are common hands-off investments that put money into a specific list of securities and can earn decent returns with minimal time management, low fees and excellent diversification.
Other millionaires also seek dividend-paying stocks that can generate passive income. And, of course, they are also interested in capital appreciation but, for some, that's less of a concern than generating current income.
If your focus is to generate passive income through dividend or real estate investments, many high-net-worth clients work with financial advisors to create a financial plan that includes sources of passive income. Additionally, some advisors specialize in wealth management, which typically combines investment management and financial planning services under one umbrella, and can walk clients through the benefits and risks of different passive income investments for their portfolios.
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Some millionaires are all about simplicity. They invest in index funds and dividend-paying stocks. They seek passive income from equity securities just like they do from the passive rental income that real estate provides. These millionaires simply don't want to spend their time managing investments.
Ultra-rich investors may also hold a controlling interest in one or more major companies. But, many millionaires hold a portfolio of only a few equity securities. For these ultra-rich investors, index funds are common hands-off investments that put money into a specific list of securities and can earn decent returns with minimal time management, low fees and excellent diversification.
Other millionaires also seek dividend-paying stocks that can generate passive income. And, of course, they are also interested in capital appreciation but, for some, that's less of a concern than generating current income.
If your focus is to generate passive income through dividend or real estate investments, many high-net-worth clients work with financial advisors to create a financial plan that includes sources of passive income. Additionally, some advisors specialize in wealth management, which typically combines investment management and financial planning services under one umbrella, and can walk clients through the benefits and risks of different passive income investments for their portfolios.
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What is ESG investing and why do some hate it so much?
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Unless you are a multimillionaire, you may not participate in a hedge fund or buy into a private equity fund. Public equity is well-known since its shares trade on stock exchanges. One of its advantages is its liquidity. You can readily liquidate your public equity or shares of stock. Private equity funds, on the other hand, generally get their investments from large organizations like universities or pension funds. Investors of private equity funds have to be accredited investors with a certain net worth, usually at least $1 million.
Accredited investors can be individuals as well as organizations, but they are defined by regulations. In other areas, private equity funds do not have to conform to as many regulations as public equity does. Some of the ultra-rich, if they are accredited investors, do invest in private equity.
Hedge funds are not the same as private equity. Hedge funds use pooled funds and pursue several strategies to earn outsized returns for their investors. Hedge funds invest in whatever fund managers think will earn the highest short-term profits possible.
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Unless you are a multimillionaire, you may not participate in a hedge fund or buy into a private equity fund. Public equity is well-known since its shares trade on stock exchanges. One of its advantages is its liquidity. You can readily liquidate your public equity or shares of stock. Private equity funds, on the other hand, generally get their investments from large organizations like universities or pension funds. Investors of private equity funds have to be accredited investors with a certain net worth, usually at least $1 million.
Accredited investors can be individuals as well as organizations, but they are defined by regulations. In other areas, private equity funds do not have to conform to as many regulations as public equity does. Some of the ultra-rich, if they are accredited investors, do invest in private equity.
Hedge funds are not the same as private equity. Hedge funds use pooled funds and pursue several strategies to earn outsized returns for their investors. Hedge funds invest in whatever fund managers think will earn the highest short-term profits possible.
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What is ESG investing and why do some hate it so much?
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Commodities, like gold, silver, mineral rights or cattle, to name a few, are also stores of value for millionaires. But they require storage and have a level of complexity that many millionaires simply don't want to deal with.
Alternative Investments
Some millionaires, along with the ultra-rich, keep a portion of their money in other alternative investments, which include tangible assets like fine art, expensive musical instruments or rare books. Millionaires and the ultra-rich also have investments in intellectual property rights for songs or movies, which can be very lucrative investments.
Bottom Line
Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios. More than one of these types of investments can be combined in comprehensive strategies with the aim to build wealth.
This story originally appeared on SmartAsset and has been independently reviewed to meet journalistic standards.
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Commodities, like gold, silver, mineral rights or cattle, to name a few, are also stores of value for millionaires. But they require storage and have a level of complexity that many millionaires simply don't want to deal with.
Alternative Investments
Some millionaires, along with the ultra-rich, keep a portion of their money in other alternative investments, which include tangible assets like fine art, expensive musical instruments or rare books. Millionaires and the ultra-rich also have investments in intellectual property rights for songs or movies, which can be very lucrative investments.
Bottom Line
Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios. More than one of these types of investments can be combined in comprehensive strategies with the aim to build wealth.
This story originally appeared on SmartAsset and has been independently reviewed to meet journalistic standards.
