It is clear from the numerous surveys carried out around the world that the importance of ESG to professional investors and individuals continues to grow each year. This sentiment comes from a good place, and aims to right the inequalities and inefficiencies inherent in our society today. Frequent headlines about climate change, poor working practices and the gender pay gap serve to reinforce these views in the minds of consumers, and harden their resolve to act. This rising ground-swell of popular opinion has been progressively pushing a somewhat reluctant financial services industry further down the ESG path every year for at least the last decade. What started as a fringe activity has now become very much mainstream. In the UK in particular wealth advisors and investment managers already see a clear ESG commitment as being a minimum entry point for attracting new assets. Yet despite the demand and the huge resources now focused on addressing it, there remains no clear rule book to follow.
Vast marketing dollars are spent demonstrating individual firm’s commitments to ESG and yet it remains remarkably difficult to accurately compare one fund from another without recourse to simple exclusion lists (no defence or tobacco etc) or even simpler returns performance. Other comparisons are rarely truly like for like. Cynics would argue that this is simply the industry using obfuscation to its advantage while making very few real changes to the way investment is done – and a few years ago I would have agreed. However, this view now seems outdated as there are genuine indications of change across many firms, not least from the rising internal importance of sustainability roles. Senior management have got the memo and they are driving real change. The intention is clearly there, but the picture remains just as confused.
Having been several times involved in incorporating ESG standards into fundamental equity investment processes I am acutely aware of the vast landscape of options that need to be considered. Much of the problem stems from the name. ESG is a catchall term that encompasses so many elements from board composition and gender pay, to biodiversity and carbon emissions. This is matched by a bewildering array of organisations offering different standards, goals and frameworks for reporting and analysing behaviour right across the spectrum. As a result It is easy to become overwhelmed by the complexity and end up achieving very little of tangible benefit. I believe this is a significant contributor to the accusations of ‘green washing’ across the financial services industry. In an effort to avoid this label investors have increasingly moved towards a box ticking approach to at least show something tangible to clients and prospects. After all, in order to achieve real change we must have real targets. The intention here may be the right one, but it is also the source of my concern. This approach can lead to an overly narrow review of the target company, and may lead to analysts simply going through the motions. Less scrupulous companies can provide shallow responses in order to tick the box and move on. This helps no-one.
Ultimately a positive ESG approach must begin with culture and intent. As investors we have not only a fiduciary duty to clients, but also a wider societal and environmental responsibility. In order to fulfil these roles we must understand the true attitudes and objectives of the companies we research, and they must understand ours. ESG is a dialogue in which management teams must understand that entrenched attitudes and behaviours are no longer acceptable. In order to achieve the environmental and societal aims that are increasingly pressing, change must happen. Each company faces a different set of challenges and can contribute in their own way. Heavy users of energy or raw materials will clearly have a different focus to asset-light service companies, and it is the analyst’s role to ensure that the right targets are being set and achieved. Tools such as the SDG Compass and the SASB materiality maps can help with this process. The key is to engage so that execs know that their feet are held close to the fire, and investors feel the same pressure from clients and the public. In the longer run this should be beneficial for profits and all concerned as change for the good will pay dividends in terms of improved energy efficiency, more transparent supply chains, better customer retention and reduced staff turnover. These tangible improvements can then be related to shareholders and their clients.
ESG is rapidly becoming a standard part of the investment world and no longer the differentiator it once was. Now the industry needs to talk less and achieve more, and the actions will speak louder than the words. Corporate responsibility is the responsibility of all stakeholders, and it begins with asking the question ‘what are you doing today to make tomorrow a better place?’