How ESG Investing Can Reduce Risk

Sustainable investing isn't just about values, it's about managing the risks in your portfolio

Alex Bryan 28 July, 2020 | 12:50AM

Umbrella in the rain
The market is good at evaluating and pricing systemic risks that are regular and easy to quantify - "known unknowns”, if you will, things like changes in the business cycle or interest rates.

But as the coronavirus pandemic has shown, the market doesn't do as well with risks that are difficult to predict or quantify - the "unknown unknowns”. The environmental, social, and governance risks most firms face fall somewhere in the middle of this spectrum.

There are clear examples in which firms' failure to manage ESG risks has hurt the value of their stocks. Most of these issues have been firm-specific and so tended to have little impact on a well-diversified investment portfolio. But there's a good chance this may change over the long term, as companies face greater scrutiny from consumers, investors, and governments alike over their ESG practices.

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About Author

Alex Bryan  is an ETF analyst with Morningstar.

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