It is time to unbundle environmental, social and governance criteria in the ESG framework, according to a report by data company Util. “Each represents a suite of different, even conflicting, objectives,” said the report. “An acronym or catchall concept obscures valuable information and misdirects flows,” it damningly added.
Taking the temperature on such an idea, portfolio institutional found ESG investors and industry players had a range of views on this.
Peter Mennie, chief sustainable investment officer at Manulife Investment Management, broadly welcomed the idea. “In principle it would be ideal to separate out the various issues in sustainability to enable portfolios to focus on certain areas and avoid harm in other areas.” But, he noted: “It’s important to recognise that frameworks for disclosure are not as mature across the subject areas.”
Jacqueline Amy Jackson, head of responsible investment at pensions pool London CIV, gave a thumbs-up to the approach – but in a wider perspective than Util’s original thinking. “I welcome Util’s approach and believe that highlighting the complexity of trade-offs within different industries, across the 17 different sustainable development goals (SDGs), which themselves define a total of 169 SDG targets, will be useful information for investors.
“Impacts can be unpredictable,” she added, “and understanding where hotspots of risk and opportunity lie across different investments may help put impact back under the microscope, instead of resigning it to soundbites by so many.”
Serious sustainability
But Ben Constable Maxwell, head of sustainable and impact investing at M&G, said bundling ESG has given the concepts collectively some weight within the investment world. “ESG as a triumvirate of issues has been highly effective in getting sustainability risks taken seriously by mainstream investors,” he said.
Expanding on this, he added: “Bundling the ‘E’ & ‘S’ with the ‘G’ of governance gave sustainability a degree of credibility with those companies and investors who had hitherto been sceptical about its relevance and got these issues onto the agendas of corporate boards and investment committees.”
And for Peter Uhlenbruch, director of financial sector standards at responsible investment campaigning charity ShareAction, the connection between the component ESG parts is important. “The complex interactions between environmental and social issues, including climate change, nature loss, governance and social inequality requires responsible investors to understand and respond to trade-offs, both at levels of financial risk and real-world impact.”
For example, Uhlenbruch added: “A myopic focus on emissions overlooks the critical role of corporate governance and of human resources from a just transition perspective in the context of achieving a 1.5-degree aligned outcome. Responsible investment frameworks should aim to capture all factors pertaining to ESG, their inter-connection, how materiality is defined and assessed and how trade-offs are resolved in a way that achieves positive net impact across ESG factors.”
Data debate
Mennie said this was in fact the time to stress the importance of data in the ESG debate. “We are beginning to have more accurate and actionable data for example on a company’s impact on climate change in its operations, but we have far less insight in other really crucial areas such as impact on biodiversity loss.”
Likewise, noted Mennie, it is important to distinguish between what we know about negative impact: such as pollution through emissions versus positive impact. “There is limited data about how many companies’ goods and services may make a positive contribution because it is not a requirement and even if data exists it may not be comparable across companies or subject to the same scrutiny as audited data.”
Also taking the argument on, Constable Maxwell noted how greater clarity is needed within the ESG universe. “Greater definitional clarity is clearly needed in this whole area. ESG is not the same as impact, however both deal with broadly the same underlying sustainability issues.”
And he added: “ESG’s modus operandi is to focus on risk – how investors can understand and manage ESG or non-financial risks in their portfolios; impact investing focuses on tackling major societal challenges by financing the solutions to those challenges.”
This is where impact investing has a big role to play, added Constable Maxwell. “Financing those companies providing the solutions to seminal issues like climate change, pollution or inequality is what impact investing was created to do.”
Jackson is convinced an even wider basis of thinking about ESG should take place. “If we’re going to be assessing ESG factors, economic performance should not sit as a priority which undermines the barely visible externalities which have a negative impact on the quality of lives all over the world,” she said. “It’s not that companies shouldn’t strive for growth but it’s time to look at processes and operations, find new business models and products in the journey to revolutionary financial and economic models which actually work, for everyone.”
And Jackson warned about the aims of merely shifting the approach to ESG: “Minor tweaks to existing models will not fix the climate crisis, nor solve the SDGs,” she said.
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