ESG investing won’t change the world

It's just good risk management - even the most 'anti-woke' should see that

Recently the negative narrative around responsible investment has become focused on its so-called ‘woke’ agenda. This is particularly so, but not exclusively the case, in the US with Florida and Texas banning pension funds from investing with asset managers who make decisions based on ESG factors. 

Now these are not managers whose sole investment criteria relates to building a better planet. These are mainstream and household names, with the likes of Blackrock, JP Morgan, abrdn and Schroders among those in the firing line. Simply put, they have been incorporating ESG factors and stewardship, to no doubt differing degrees, within their investment process.     

Articulating approaches

Taking a step back, if we think about this in unsophisticated terms, following a responsible investment approach falls into two categories:

  1. Risk mitigation and identifying opportunities: the integration of ESG factors and stewardship within the investment process
  2. Specific responsible investment related objectives: this builds on the first element and relates to linking products or strategies to specific responsible investment related outcomes or objectives   

The majority of these managers’ strategies will fall in the first bucket of risk mitigation. The problem is it seems that even this is too dangerous, or ‘woke’, for certain states in the US, while for others it isn’t enough.

This is a tightrope that is perhaps familiar to many asset managers at the moment in terms of clearly articulating what they are doing and what they hope to achieve. A lot of managers are trying to appeal to different audiences with very different requirements and this can result in confused messaging.

The incoming disclosures and labelling regulation from the Financial Conduct Authority should help with this in the UK at least, although the situation in the US is more nuanced.

In recent conversations with US based managers, for example, who aren’t signed up to the UN-backed Principles for Responsible Investment, there is significant push back against making such a move given the uncertain regulatory position in the US and the actions of certain states.

Given the way the US is structured, it will be incredibly difficult for authorities to land on one set of regulations that pleases all 50 states, let alone also taking into account the global picture.

Certainly, the slap dash and lazy labelling of everything as ‘ESG’ has not been helpful and has resulted in a muddle. Now we have the different approaches to being a responsible investor being lumped together into an amorphous blob. We have come to a juncture where we need to think about the approaches we take.

Lost in translation

Taking the risk mitigation approach, hopefully by now it is accepted that ESG-related issues may have financial consequences for investors. By ignoring these asset managers are compromising their fiduciary responsibility. This is simply about doing your homework on the investments you manage. You are hopefully not claiming to change the world through this approach, however, you are assessing the risks and challenges for each investment you make though the lens of ESG issues.

As a result, I sometimes wonder whether we have got this all wrong by using this catch all ‘ESG’ label and this has created an industry and the root cause of why we should be looking at these factors has been lost.

I would think, and hope, that even the most die-hard ‘anti-woke’ talking head would be concerned if investors were not considering the efficacy of the management and the board; or whether the company had taken into account all the regulations that impact it globally. This tends to become more emotive when we add in the E and the S – and personally you are hard pressed to separate the G from the E and the S as they have intersectionality as ultimately, they all relate to how well a company is managed.

Much of this message has been lost in the conversations we have seen this year and ultimately this has resulted in a polarised debate. Consequently, influential politicians and investors have coalesced around these poles and this has helped to foster some of this confusion. The only way to unwind this and ensure investors are on the same page when it comes to responsible investment is to get back to basics and simplify the terminology we use.