Environmental, Social and Governance (ESG) issues alone do not evidence a link between a company's social impact and its bottom line, according to the authors of a recent article in Institutional Investor on the move towards investing with 'shared values.'[1]
Asset managers' endemic efforts to integrate ESG into their funds, their sales materials and their brands are driven by the belief that it will demonstrate to investors that they are doing good things. Unfortunately, this is being done without understanding that ESG shouldn't be an output or a target. In many cases asset managers' analysis of E, S and G factors is designed simply to reduce the regulatory or reputational risks of their portfolio companies.
ESG is in fact an input into portfolio management, which can then manifest itself in any number of ways or products: core funds, negatively screened funds for charities, funds focused on sustainability, funds focused on impact… the list goes on. By focusing solely on the outputs of ESG, we forget all the ways that investment can be a force for good - and this is frustrating, because investing is actually a good thing! As the authors point out, the purpose of investing is to create a virtuous cycle by allocating capital to those companies that create the greatest societal returns. Not only does this drive present returns, but also future growth and opportunities.
Beyond a slightly pedantic academic point, however, what does this all mean for investment marketers?
To me, it means that there's a great opportunity for businesses who manage to look beyond ESG and focus on words such as purpose and authenticity. Those businesses who can go back to basics and look at what's truly different about themselves, rather than trying to own or have an opinion on every current theme and hot topic. By aligning their own purpose with the original purpose of investing and creating a story that's truly authentic, asset managers can avoid accusations of greenwashing and jumping on the ESG bandwagon - both unfortunate realities for too many fund providers.
This focus on authenticity also indicates an ability to leverage a hugely powerful word, too often sadly lacking in our industry: emotion. To engage with investors at a human level, with words and concepts they understand - focusing on the customer experience and journey, and not whether a fund has a track record of outperforming its benchmark by 0.7% per annum over the last three years and is therefore worth buying.
So, go on - do everyone a favour and stop talking about ESG. We might even have a chance of preserving capitalism's "legitimacy as a vehicle for advancing society."
*If you like this blog, you may also be interested in other content from our 12 days of Christmas challenge*
[1] https://www.institutionalinvestor.com/article/b1hm5ghqtxj9s7/Where-ESG-Fails