ESG, SRI, PRI, Sustainability, Responsible Investing… Over the past decade, we’ve seen these terms used to describe the same thing: an ethical approach to how we treat our planet and other people when making financial and investment decisions. The concept has been around since the 1960s, spurred by the civil and labour rights movements as well as the historical protests against apartheid (though it can be argued that it even goes back 200 years to the money management practices of the Methodists).
In this article, we will settle on the term ESG, which stands for Environmental, Social and Governance lenses through which investors can view and measure the behaviour of the companies they may wish to invest in.
ESG is a growing concern
According to the Global Sustainable Investment Alliance (GSIA), at the end of 2018, there was nearly $23 trillion worldwide managed professionally under Sustainable and Responsible Investment strategies. SRI has been growing globally at an annual rate of 14.6%, with more than half of the managed assets in Europe.
Meanwhile, JP Morgan Asset Management’s research shows that ESG engagement among the under 35s is growing rapidly, with 41% reporting greater interest.
There is also a growing sense that effective ESG translates into good company performance: “Increasingly, there is a broader appreciation of the idea that good governance translates into better management of areas such as carbon footprint and workforce engagement,” explains Lori Heinel, deputy CIO at State Street Global Advisors. “This creates better quality companies that provide better performance over the long-term.”
So where do you stand on ESG?
No two investors share the same views
One of the big challenges to ESG becoming mainstream is the lack of standardisation of accepted criteria; ethical beliefs are uniquely personal. Even with something seemingly straightforward as ‘controversial weapons’ the term itself can be contentious. One investor may care more about the environment and another about people.
If your name’s on the list, you can’t come in
To help make responsible investing more standardised, ethical behaviour has become categorised using societal norms and currently a large proportion of ESG is made up of exclusions. For example, United Nations’ Principles for Responsible Investment (PRI) has a framework of international norms which include labour rights, inhumane weapons, environment, human rights and corruption, all creating ‘qualitative screens’ for investors and asset managers alike.
Tick that box or help create a better box?
Simply excluding a company for ‘bad behaviour’ is all too easy and ultimately reduces our investment choices. It also does not necessarily help to make the world a better place. Moving forward, more investors are becoming keen on engagement and improving – one could say ‘rehabilitating’ – companies which otherwise show good investment potential. One mechanism for this is investors exercising their voting rights as shareholders and engaging with management to positively drive ESG.
You need to be clear about your ESG message
For asset managers wishing to attract the next generations of investors, our story so far shows that while interest in ethical investing is steadily growing, there’s no one-size-fits-all ESG solution and it’s no longer enough to simply ‘not be doing bad things’. Crucially, the breadth of the subject matter demands precise articulation and differentiation of your ESG offer – without clarity, why should investors choose your ESG solution over your competitors’?
For some time now, we have been in a privileged position to glimpse what ESG means to some of the financial services organisations we have worked with. Here are their stories.
Does ESG define you?
One huge and long-established Dutch asset manager has set its sights on becoming the front-of-mind global champion of responsible investing. Recognising the multifaceted appeal of ESG and its investors’ diversity of beliefs along with their idiosyncratic requirements, it has created a comprehensive matrix of bespoke solutions, graded by category and the level of ESG involvement (From Responsible, to Sustainable, to Impact investing), all presented under a banner of “helping investors to improve the world”. With its considerable experience of ESG and a dynamic international network it is aiming to capture the brand territory in ethical asset management.
Do you measure other people’s ESG for a living?
It was only a matter of time before market benchmarks could be used as tools to measure ESG and provide investors with the objective and reliable data they have been craving. By partnering up with sustainability-focused research companies, a well-known European index solutions provider has helped to create a new ESG playbook, devising ever more accurate standards for measuring an organisation’s ‘level of greenness’. Its motto is: “Measure it, manage it and ultimately, reduce it.”
Do you have ESG, but are ashamed of it?
Ethical investing can be a tough message to sell in the alternative asset class. Hedge funds don’t typically enjoy a reputation for being responsible or caring and this can be even harder for specialists in Emerging Markets, where they risk being seen as simply profiting from the economic misery of others. This can result – as we’ve found in one case – in the brand avoiding any overtly public declarations of ESG activity, instead of channelling its philanthropic and environment-protecting energy into ‘under the radar’ activities, such as wildlife charities or personally-funded social projects in their investment zones. In this case, the charitable recipients benefit, while the genuinely generous donor’s brand reputation doesn’t.
Can you already have some ESG without realising it?
In some cases, the organisation may already be actively engaged in ESG without giving itself the credit for it. A case in point is a 160-year-old family bank in Bermuda, which provides asset management as one of its services. Since few of the local investors seem to be interested in the manager applying ethical criteria in its portfolio construction, ESG is not something the bank is especially vocal about. Meanwhile, it has been supporting the island community for many years, donating $10,000 a month to different charities, from mentoring programmes to counselling and emergency services. The result is a good example of a big ‘S’ in ESG that should be better recognised in its own right.
Is it possible to put some ESG in your brand?
The optimal scenario is where an organisation is already living and breathing ESG, inside and out. If it also decides to update its brand image to reflect this, that’s ideal. A Swedish hedge fund came to us with such a request, believing themselves to be different from the rest of the industry. They were right: their open, collaborative and inclusive culture created the basis for acting on their investors’ behalf as PRI signatories with a clean conscience. In creating the new brand, we expressed these values through the application of the logo concept, colour scheme, photographic style, as well as the arrangement and movement of branded elements across all marketing channels. The result? ESG is now in the brand’s DNA.
A final (cautionary) word
Principles can also have a price
Moral choices are often full of contradictions. The long list of moral dilemmas includes: windfarms massacre birds, child labour in developing countries is often the only source of income for entire families, while Big Oil hasn’t just harmed the environment but has also facilitated urbanisation and the rise of the middle class.
In the meantime, it turns out that some of the accepted pariahs of ESG (tobacco, alcohol, gambling, arms) have been outperforming their ‘good’ peers. Named the ‘Sinful Index’ with its own ‘Sin Alpha’ it is shown to outperform the market by 5.8% annually, and “where the tobacco industry stands out with the highest abnormal return, the other industries grouped together still produce significant outperformance”.
This means that whatever the ethical choices made by investors are in the end, once put into practice there can be further paradoxes. For example, if the goal of a charity is to maximise the benefits for their stated cause, by investing in a ‘socially responsible way’ they may in fact be generating a lower return.
So maybe the correct question should be, how convinced by ESG are you? Because to get others to believe something about yourself, you need to believe in it first.
We think the answer is that no organisation needs to be ‘all things to all men’ (or women), but as the world at large is becoming more connected and informed – and responsible and caring as a result – it is important to promote to your audience the ‘good’ values that you do feel comfortable acting on. And it is something that we are particularly good at: holding up a mirror to our client’s soul and reflecting in their brand the best they can be.
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