The widespread awareness and adoption of sustainable investing has shown us that, due to better technology and heightened transparency, investors are more aware of how their money is being put to work, with more information at their fingertips than ever before.
The growth in sustainable investing is undeniable, and was largely unencumbered until recently. For years now, leading asset managers have considered ESG issues in the investment process as a tool to make better investment decisions that reflect a broader set of risks and opportunities. More data and research to provide a clearer lens on companies. Increasingly more asset managers have decided to use ESG information. Many have decided to market that they do, and either overstate their use of ESG information in fund labels and collateral, or communicate their approach in generalities that are vague and that the average retail investor may not understand. This has led to a certain level of skepticism from investors, which is understandable. Regulatory bodies globally, as a result, are working towards implementing a framework and taxonomy for how to label and classify funds based on the approach to sustainable investing. These developments are an important part of an evolving financial ecosystem.
In the process of this shake out in terminology, proponents of sustainable investing have gotten caught up in their highbrow definitional debates, while critics have tokenized “ESG” and weaponized it as a political agenda. Typically, these critics have tended to have a fundamental misunderstanding of what sustainable investing encompasses.
The acronym ESG is relatively new to the average investor, not widely understood yet, and has been oversimplified and misconstrued.
Usually the minute someone says “it’s more nuanced than that” you see people’s eyes glaze over. They want the sound bite. The sexy tag line. And then the easy button. That’s how we got here.
So let’s set the record straight on a few things.
From the CFA Institute: In many ways, sustainable investing can be seen as part of the evolution of investing. There is a growing recognition among industry participants that some ESG factors are economic factors, especially in the long term, and it is, therefore, important to incorporate material ESG factors. There are three critical elements of sustainable investing:
• Sustainable investing is additive to asset management theory and does not mean a rejection of foundational concepts.
• Sustainable investing develops deeper insights about how value will be created going forward using ESG considerations.
• Sustainable investing considers diverse stakeholders, consistent with how companies are developing.
We should be guided by our accredited financial institutions to inform our investment decisions, not politicians.