ESG News ESG: YOU CAN GO YOUR OWN WAY
Could unbundling the E, the S and the G improve non-finan- cial outcomes? Andrew Holt finds out.
It is time to unbundle environmental, social and governance cri- teria in the ESG framework, a report by data company Util has concluded. “Each represents a suite of different, even conflict- ing, objectives,” the report said, adding: “An acronym or catchall concept obscures valuable information and misdirects flows.” Taking the temperature of such a concept, portfolio institutional found that investors and industry players have a range of views on this. Peter Mennie, chief sustainable investment officer at Manulife Investment Management, broadly welcomed the idea. “In prin- ciple, it would be ideal to separate the various issues in sustain- ability to enable portfolios to focus on certain areas and avoid harm in other areas.”
This is not the only reason he supports the idea. “It’s important to recognise that frameworks for disclosure are not as mature across the subject areas.”
The approach also receives a thumbs-up from Jacqueline Jack- son, head of responsible investment at local government pen- sion pool London CIV. “I welcome Util’s approach and believe that highlighting the complexity of trade-offs within different industries,
across the 17 Sustainable Development Goals
(SDGs), which themselves define a total of 169 targets, will be useful information for investors. “Impacts can be unpredictable,” she added, “and understand- ing where hotspots of risk and opportunity lie across different investments may help put impact back under the microscope, instead of resigning it to soundbites.”
Serious sustainability But Ben Constable-Maxwell, head of sustainable and impact investing at M&G, said bundling has given ESG’s concepts some weight within the investment world. “ESG as a triumvi- rate of issues has been highly effective in getting sustainability risks taken seriously by mainstream investors,” he said. Expanding on this, Constable-Maxwell added: “Bundling the ‘E’ and ‘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 stand- ards at responsible investment campaigning charity ShareAc- tion, the connection between the component ESG parts is important. “The complex interactions between environmental and social issues, including climate change, nature loss, gov-
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ernance 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 emis- sions overlooks the critical role of corporate governance and of human resources from a just transition perspective in the con- text of achieving a 1.5-degree aligned outcome. “Responsible investment frameworks should aim to capture all factors pertaining to ESG, their inter-connection, how materi- ality 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 is 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 cli- mate change in its operations, but we have far less insight in other crucial areas such as impact on biodiversity loss.” Likewise, Mennie added, it is important to distinguish between what is known about the negative impacts, such as pollution through emissions, versus the positive impacts. “There is lim- ited 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 compa- nies or subject to the same scrutiny as audited data.” Supporting the argument, Constable-Maxwell said how greater clarity is needed within the ESG universe. “Greater definitional clarity is clearly needed in this area. ESG is not the same as impact; however, both deal broadly with the same underlying sustainability issues.
“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, according to 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 fac- tors, economic performance should not sit as a priority which undermines the barely visible externalities which have a nega- tive 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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