Balloon Leprechaun Matters2

VALUES FIRST - ESG LATER

THE IMPORTANCE OF BEING EARNEST

Environmental, Social, and Governance (ESG) criteria have become an almost indispensable aspect of today’s investment markets. However, is this just a passing trend?

It has been a while since the largest companies began incorporating Corporate Social Responsibility reports into their operations systematically, with some pioneers in this practice dating back over 20 years (kudos to Procter & Gamble).

It appears that these reports and associated “metrics” are here to stay, but what exactly do they signify?

For the moment, let’s set aside impact investors and activists who prefer their actions to do the talking (a topic that can be explored in a future post). What truly lies beneath the broad and somewhat ambiguous concept of ESG? After all, these three words collectively encompass the entire planet (Environment), the entirety of the human race (Society), and the principles governing its functioning (Governance).

Balloon Leprechaun Matters2

THE LEPRECHAUN AND ITS POT OF GOLD

It appears that the term “sustainability” has evolved its focus from primarily social and environmental concerns to a more financial and economic perspective. “Sustainable Investments” is a term that garners significant attention in the market, but upon closer examination, it seems that it can be roughly translated as “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 is the most recurrent ESG strategy in the USA and doesn’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.

Balloon Leprechaun Matters2

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