ESG Investing, Please Stop Calling It That

ESG are issues that are important, sometimes data can help, sometimes investment can help, but not always, so let's stop using this phrase

Why did we start using the phrase ESG Investing?

I find it confounding, but now we have the CFA Certificate on ESG Investing, PRI and the US SEC also lead with this phrase, and in general ESG Investing as a term seems to have become du jour in 2022.

Looking back, when Sophie Purdom and I produced the popular Sustainable Investing: Revolutions in Theory and Practice in 2016, we suggested the Seven Tribes of Sustainable Investing. Further back to Nick Robins and our 2008 Sustainable Investing: The Art of Long-Term Performance, we tried to help steer the field towards more positive, effective approaches, including early forms of what became Impact Investing as opposed to the purely negative screening which the field started with, when it was more known as Socially Responsible Investing (a phrase you don’t hear much anymore, would like to think we helped push back on that one also) and which is really the one realm of sustainable investment getting specific pushback on from US states such as Utah, Texas and West Virginia.

By being clearer on these seven distinct tribes: negative screening vs. positive approaches such as positive/best in class strategies, impact strategies, thematic approaches, advocacy and minimum standards, pushback on these US states would be more effective. Five of these seven aproaches are positive (while ESG integration now seems like greenwashing if institutions aren’t being careful).

Yet, much as most academic papers treat the entire field as one thing when considering how the field financially performs, the lazy moniker ESG Investing suggests once again, that negative screening is the starting point, hence lobbyists can have a field day as if this is all just one thing.

For me, once we even get slightly granular, this US state pushback becomes an immediate non starter.

Who for example can push back on the idea of investing in Asia while considering corporate governance? Who would invest in a company without knowing you could trust your money to be well managed? Asia is half of the world’s economy as we speak, are we supposed to ignore the potential upside there? Is that really what state attorneys general think is in the best interest of beneficiaries?

There are many cases of investment success in this regard, but only if such concerns as above are navigated. See the excellent, fully transparent Stewart Investors website for example, where you can see all of their holdings and their reasoning. Mark Mobius for another was astonished when he found out about this US state pushback, and his excellent book Invest for Good makes clear how navigating ESG is essential in the region, for any investor. Try and find a major financial institution not rapidly trying to position themselves in countries like Singapore and China, let alone across the rising ASEAN region. This alone makes pushback on ESG a non starter.

But most of all, please just stop using the phrase ESG Investing.

Who started this anyway?

I took a look and found some MSCI pieces which suggested this phrase around the same time as our Revolutions book. Perhaps it was self-serving for the ESG data providers to suggest that they had the magic solution that you needed to make ESG Investing happen. The self-serving nature of the large data providers never seems to stop, even while their solutions are clearly insufficient for full purpose though helpful in some ways at times, they need to be clearer about what they actually do well (and not).

ESG are issues - I would like to scream this from my rooftop if I could! And they are all important issues, to someone, somewhere.

The idea of only focusing on “material” issues is understandable, but is typically dealt with on backward looking evidence, which has nothing to do with the future which will be increasingly affected by runaway climate effects. This alone is complete madness and folly and another danger of oversimplification.

ESG are issues and data can help, but not always. Data can help with some of the basics especially (and perhaps only) as a useful system-wide set of potential red flag indicators letting corporations know they are being watched and are on the hook to perform at least to an acceptable minimum standard on environmental, social and corporate governance practices, and that these standards may well ratchet up over time. Very useful.

ESG data cannot however tell you who will win the race to build the driverless, electric car that the market will eventually take to, let alone who will win other races to innovate and transform markets and sectors.

Having been part of the ESG data scene myself up through 2012, the dynamic has been made clear to me how the ESG data providers have felt the need to act, in keeping tight reign on their black boxes and the understandable dynamic and importance of breaking even financially (finance is too often the missing dimension of ESG, hence our ESGFQ), then making a profit themselves, and then selling their business to reward their founders.

Investing doesn’t always solve ESG issues either, hence ESG Investing is an even more loaded phrase for that reason as well.

ESG are granular issues such as air pollution, toxic chemicals, climate change and greenhouse gas emissions, people and their wellbeing and so much more. Sometimes solutions are in multistakeholder dialogues and other forms of global collaboration, in effect SDG 17, arguably the most important goal of all, given there is only so much one actor can do, no matter how large they are, when it comes to pressing issues such as climate.

So please, pretty please, stop calling the field ESG Investing.

Polls show Sustainable Investing was the most well accepted phrase. Impact Investing is fine also as an overarching phrase if we must, but we see Impact as distinct in practice, one of the critically important seven pillars.

But it’s not ESG Investing. It never was, it never will be.

ESG are issues, they are important, sometimes data can help, sometimes investing can help, but not always, and calling the field ESG Investing suggests otherwise, and we need to stop it at once.