Last week’s publication by the Economist Intelligence Unit of a report criticising some aspects of ESG investing should not be seen as a reason to be sceptical about whether companies can or should manage environmental, social and governance issues. Is ESG dead? Very far from it, in our opinion.
The report correctly criticises the behaviour of asset managers, investors, companies, rating agencies and even regulators. We agree that where ESG is concerned, measuring less but better is the right approach.
Regulators have as usual tried to be too comprehensive in their approach, creating a situation where companies are forced to rush into trying to document their ESG performance, in a situation where a shortage of ESG information and skills is bound to lead to inaccurate documentation. The actions of many companies involved in the world of ESG investment have muddied the waters badly, mainly because of a very short-term focus.
However, none of these criticisms suggests that ESG is dead or invalidates the importance of the ESG focus, whether in managing companies or investing in them. As Aron Cramer pointed out in his recent blog, the gaps between aspiration and delivery and between public positive pronouncements and private opposition to ESG-focused changes in taxes and regulations, combined with confusion about the very meaning of the term ESG and its components, have not helped. Perhaps most importantly of all, the short-term view taken on what is essentially a long-term issue has been at the centre of the problem.
As we have identified in a previous blog, in the earliest days of hype, strange things happen, but these things rarely affect the long-term value associated with a changed approach. Where ESG is concerned, the long term is really long. It is one where a new approach takes years to embed and where good results may take decades to show, but also one where taking a series of small steps to improve things will bring steady improvements. As recent research sponsored by the Financial Reporting Council into governance and the response by companies to the FRC’s new Stewardship Code has shown, changing an approach to how companies are managed takes time.
It is for this reason that the Code’s focus on long-term goals for the investment community is welcomed by the asset management industry. The FRC research echoed many of the issues associated with ESG investment, namely the need for a more reflective and long-term approach rather than a hurried one, the problems of judging the effectiveness and of identifying what good engagement with a new set of principles looks like, the costs of documenting performance and the requirement for a joined-up approach. One point about the FRC research should be taken seriously by those involved in ESG management and investment – the Code was first developed in 2010 (and revised in 2020). Twelve years later, it is clear that adherence to the principles of the Code still needs a lot of work.
This same long-term approach can be seen in the EU’s Sustainable Finance Roadmap, published earlier this year. One of the points it emphasised was the need for long-term capacity-building, covering understanding of legislation and of the relationship between finance and sustainability.
This long-term approach applies to ESG and ESG investment. Is ESG dead? Look at it instead like this: We are still at the earliest stages, in particular learning what data to use and how to use it. Of course, sceptics are right to identify the weakness in the short-term links between ESG performance and investment returns. But they are wrong to use this as a foundation for total scepticism about ESG and ESG investing.
That is why an approach – which is ours – of analysis of the continuous flow of data about ESG performance from many sources helps us build a clear picture of what particular companies, industries or even whole countries are doing.
No panic buttons are being pressed. Nobody is being hung out to dry. Instead, we have a steadily evolving and clear picture of what is going on, one that can be used by investors, asset managers, pension finds, banks, other companies, industry bodies, regulators, taxation authorities, and governments.
If you have been wondering “is ESG dead”, let us convince you otherwise.