What challenges or hurdles can prevent clients from embracing environmental, social and governance investment?
The first is fear.
While fears and concerns over climate change can act as a motivators, they can also be inhibitors when it comes to investing in ESG.
Eugene Krishnan, chief financial officer of US digital health organisation Jaan Health’s view is that some may be feeling pressure to do everything all at once, and that may mean losing out financially. Such fears, he says, may prevent them from investing.
This problem is addressed by Stuart Dunbar, partner at investment company Baillie Gifford.
Dunbar admits that while some people worry about a conflict between ESG and returns – namely that returns will be compromised in the interests of sustainability – or perhaps a conflict between environmental and social factors, this not the case.
Far from it, he says. “The misconception that incorporating ESG factors into investor decision-making puts income at risk is wholly wrong.
“So too, is the idea that this is a completely separate topic to investing well. Investing well is how you should think about this. It’s a positive thing, rather than a negative.”
He continues: “I don’t actually see a conflict of interests between the E and the S and the G.
“In the long run, companies that don’t behave responsibly or to a responsible degree, who are poorly governed, who don’t have responsible policies in place, those are the companies that stand to be much more challenged anyway.”
Metric misapplication
Greenwashing is also a threat of course, and this is very much masking the value of ESG and its ability to have maximum impact.
Part of this is the unintended consequence of misapplied, and misleading metric analysis, which makes it hard for investors and advisers to understand ESG ratings.
For example, Flora Wang, director, sustainable investing at Fidelity International, says when it comes to metrics it is clear that “a single, data-driven ESG rating cannot (and should not) try to be everything at once”.
As a minimum, she says there needs to be two distinct ratings: one to reflect a company’s positive impact and another for its negative externalities.
“Attempting to capture both in one score dilutes the informational value of the final rating – as the positives and negatives inevitably cancel each other out, resulting in a rating that fails to represent either and can’t be relied upon to guide capital allocation decisions,” she says.
Wang suggests that the ESG rating could focus on the negative impact a company has and use another system, such as the UN’s Sustainable Development Goals framework, to assess its positive business activities, such as products designed to tackle climate change.
