VALUES FIRST - ESG LATER
THE IMPORTANCE OF BEING EARNEST
Environmental, Social, and Governance (ESG) criteria are an almost mandatory aspect of today’s investment markets. But is this a fad?
Well, it’s almost a decade since the biggest companies are using Corporate Social Responsibility reports in a systematic way, with some precursors of this practice starting well over 20 years ago (kudos to you Procter&Gamble).
It seems like these reportings and “metrics” are here to stay, but what do they actually mean?
Let’s leave aside for the moment impact investors and those activists that prefer to have their actions speak for them (this could very well be the topic for another post). What does really lie behind the broad and vague definition of ESG? After all, these three words only represent the entire planet (Environment), the totality of the human race (Society) and its inner workings (its Governing principles).
THE LEPRECHAUN AND ITS POT OF GOLD
It seems that the term “sustainability” has shifted its focus from social and environmental to a more financial and economical meaning. Sustainable Investments is a term that sells pretty well on the markets but that, upon closer inspection, can roughly translate into “hey, let’s not create more problems, everybody”. What would just be a principle of common sense now has its revolutionary definition in the books of everyday financial markets.
Or, maybe, this is what is really going on: the markets are paying a premium in order to participate in investments that create a positive impact on our lives (or at least do not harm our planet) and this represents an opportunity to wear a green hat and grow the pot of gold. The Leprechaun sees the opportunity and re-brands its portfolio trying to package unsustainable and unecological deals with marketing-friendly labels: green is the new black.
ESG Integration, that is the most recurrent ESG strategy in the USA, don’t really preclude any investment activity in organisations with harming policies and procedures. They just include, or integrate, ESG risks and opportunities into the old standard analysis. While the strategy that is mostly used worldwide (including here in Europe) limits its scope to a Negative Screening of its opportunities: the old, “let’s not create more problems” approach we were referring to earlier.
Is there a way out then? It seems so. Or at least the vast majority (87%) of asset managers, owners and advisors, seems to grow more and more dissatisfied with the state of climate risks in companies’ valuations.
And this is a starting point. When the public demands certain products, the industry fills a gap providing inadequate substitutes and the managers and professionals in the industry start growing more and more dissatisfied, the chance for change sees its opportunity. And this is the chance for resetting our moral compass, stop green labelling everything and start talking about values in valuations.