By Paris Jordan
ESG, those three lovely letters come together to form something so complex. They encapsulate the growing area of investment which adopts values and morality into its approach. They represent non-traditional investment approaches borne out of the challenges we are witnessing in the twenty-first century. They are the result of client demand for our industry to do something about pressing matters like climate change, inequality, and industry integrity.
Specifically, it is the ESG framework that is receiving increasing attention within the realm of responsible and ethical investing. In fact, this framework is receiving so much attention that responsible or ethical investing appears to have become synonymous with the term ESG.
I will stick my arm out and posit that the term ESG is used by investment professionals (whether they are institutional investors, fund selectors, fund managers or financial advisers) almost unitedly to encapsulate all things responsible.
Industry participants write about it in articles, name their magazines after it, talk about it in meetings and give senior leaders in the space a title including the acronym (i.e., ‘Head of ESG’). As an industry we have passively decided that this is the appropriate term to cover ethical, sustainable, impact, responsible and all other sub-forms of ESG investing. When someone mentions ESG, we know they are talking about some form of ‘moral’ investing; our brains recognise that we will shortly be talking about voting, engagement, ESG risk metrics or something of the like. We are aware that we are talking about a non-traditional form of investments and, at least, vaguely understand the implication.
But really ESG is just one thread of a wider social investing shift. The term ESG is derived from a UN report (from 2004) where environment, social and governance were initially mentioned. Over time focus on these three factors has been hugely important and many fund managers explicitly invest in line with this specific framework. However, you’ll often see asset managers consider engagement, sustainability, stewardship, impact, and thematic investing under this ESG umbrella (for example see Man’s report on ESG, Aberdeen Standard’s Quarterly ESG Reports, and Morgan Stanley’s ESG Investing Report)
Consequently, E, S and G mean a huge amount to us investment professionals – even if they mean different things to each of us.
However, if I approach the average person in the street who owns a Hargreaves Lansdown portfolio and ask them whether he wants to invest in line with ESG, or consider ESG risk, what are they likely to say?
Frankly, I’d be surprised if they had the foggiest idea of what I was talking about. And as I’m not one for assumptions, I went and tested this theory.
I asked friends, family, and acquaintances if they knew what ESG Investing was. Sadly, I received a lot of blank faces*. I then went and asked an individual who I knew was studying environmental architecture for their master’s degree. I asked them what ESG Investing meant to them. Again, I received a blank face. I was a little disappointed and perplexed, so I decided to approach an individual who I knew previously worked at an energy think tank that lobbied government. His response? Another blank face.
*One claimed she smoked it once.
This market research was admittedly brief and, of course, there are many end clients who would know what ESG means, but my little experiment did leave me with a question that I have asked many times before while working in this industry: Why do we have an obsession with identifying a topic, usually one that is incredibly important to clients, and convolute it (and acronymise it) almost immediately?
This way of thinking is not a new phenomenon. For years I’ve witnessed investment professionals use terms like bips, dry powder, bear/bull markets, OEICs, NAV, YTM, and we even interchange the terms stocks, equities, and shares. Most end-clients haven’t a clue what we are talking about and they don’t have the time, nor interest, to work it out. Take the FCA requirement to simplify fees, for example – investors were utterly confused before the regulator demanded we change.
ESG appears to have cornered the market on terminology (see below). And inadvertently, by adopting this term, we’ve made our lives and the lives of our clients that little bit more complicated.
Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means that there was not enough data for this term.
Our peculiar obsession with TLAs (Three Letter Acronyms) has the propensity to alienate our clientele, and I would argue, already has. In a time where we are trying to be more transparent, in order to cultivate public trust, using ‘insider’ terminology creates an us-and-them narrative. Using terms such as “responsible”, “ethical” or even “moral” investing would have sufficed. Most people understand the impetus behind these words. With the default adoption of the term ‘ESG’ we have added another layer to the already complicated ethical investing landscape. Consequently, it is our responsibility to now demystify this term via client education.
I do wonder though – what could we do, what could we achieve, if all investors bought in to ESG investing without having to decipher it first. Flows and appetite in the past year has been astonishing, and that’s despite the hazy and confusing messages. Transparency and clarity could generate greater asset flows than any of us are expecting. Rather than saying ‘ESG’, using the simple but all encapsulating term “ethical” may be our solution to bring even more investors into the fold.