Feedback is so helpful. I thought my last post explained why I feel frustrated when asset managers talk about ESG investing. But the useful comments I received in response to posting on LinkedIn made me realise I had not been clear.
Using a TLA as a descriptor adds to the confusion. But even knowing ESG stands for environmental, social and governance characteristics doesn’t help an investor to understand what the manager is trying to achieve.
What’s the purpose?
This is the key point. Rather than lazily referring to their strategies as ESG investing, asset managers need to find simple yet robust language which conveys their purpose.
For example, is an asset manager aiming to reduce the risks associated with the transition away from a carbon-based economy by tilting their portfolio away from heavily polluting companies?
Or do they want to do more than avoid the risks and also select companies which will help to build a better future? Perhaps they believe the only way to build a long-term sustainable portfolio is to set preferential investment returns for those firms which improve their corporate behaviour.
Providers of passive funds may realise the best way for them to be sustainable despite being forced holders of stocks is to have a highly-motivated and well-resourced engagement team which helps companies to achieve net zero.
These strategies are all forms of sustainable investment. And it’s likely they are all described as ‘ESG investing’ by asset managers and investment consultants.
But as my more detailed descriptions illustrate, asset managers often have a clear purpose. Describing these strategies as ESG strategies does nothing to illuminate these lofty aims.
My descriptions are far from perfect. They are laced with jargon and don’t make use of language an ordinary person can understand. But they at least attempt to describe the investment purpose rather than just alluding to one part of the process.
It is compelling for a scheme member, a sole trader with a personal pension (aka me) or an ISA investor to know their capital will help to build a better future.
We want to feel confident that when we retire or cash in our investment, we will have a better chance of the planet and society being in good shape. That, after all, is the aim of sustainable investing. So why undersell what you do by calling it ESG investing?