Klisman Murati (pictured), founder & CEO of Pangaea Wire Group, has questioned whether the grouping of environmental, social and governance (ESG) focused investing under one umbrella term makes sense, as he noted that each area has its own unique attributes and drivers.
The economic expert compared the ESG acronym to the BRIC concept coined by former Goldman Sachs global economist Jim O’Neill, saying that the only reason for the subsequent addition of ‘S’ on the end of the acronym to stand for South Africa ahead of another Nigeria, candidate for inclusion, was because the acronym BRICS sounded better than BRICN.
“However, coupling [ESG] into this tryptic is unhelpful as [all the elements] possess very different qualities, forms of measurement and ideals of success,” he said.
“Having these macro metrics may sound good on paper but its real-world application is a lot more complicated and may not even warrant a common grouping like ESG.”
At the same time, Murati said there is an underlying problem in the way ESG investing is understood and implemented that is undermining the main goal of investing this way, which should be “to incentivise firms to be more responsible and effective in the areas of E, S and G”.
“ESG considerations are essentially business centric considerations as opposed to investment driven considerations,” he explained.
“What I mean by this is that ESG is targeted at companies in the real economy. Making a company’s goods and services more ESG aware and involved is where the focus should be.
“The investor’s role should be to encourage and reward those firms which are more ESG involved. What the investment community has done instead is to commoditise ESG as an investing theme, as opposed to measures which should be implemented into all companies.”
Murati warned that investors are currently not taking the actual impact of companies’ ESG policies into account as a result of this faulty and underdeveloped framework.
“I have not seen a focus on investors truly seeing what impact their investments are making in terms of ESG corporate transformation,” he said.
“What I see is mass greenwashing in order to acquire more AUM. If we do not know or cannot see who is driving this push for ESG and are stuck in our own silos, then this will be a movement of appeasement as opposed to true transformation.”
However, he believes the reason for this problem could be the fact that ESG is still in its infancy. As the concept develops, his hope is that all businesses will realise the benefits of ESG involvement, meaning that “in the future we would not need ESG themed investments as they will all be ESG involved”.