Is ESG lost in translation?

Stockholm(NordSIP)- Danske Bank & Invesco have released a white paper questioning the authenticity in ESG integration. This paper points out several problems embedded in current ESG integration. It also provides suggestions on how to avoid significant disruptions throughout the integration process.

The term “ESG integration” was launched by the UN Principles for Responsible Investment (PRI) in 2006. ESG integration, used by a large number of investors and asset managers nowadays, has entered common investment jargon but the question of what ESG really means is lost in translation through integration.

Asset managers get lost between asking how companies integrated ESG and how they should do it by themselves, in their investment process.

There has been a strong appetite for improved taxonomy around ESG considerations, and for a general coordination in standards for stewardship and risk measurements. However, in the process, screening, scoring, overlaying and filtering has generated more confusion than clarity for asset managers and institutional investors alike.

“What does ‘ESG integration’ really mean? We say that the only people who can deliver a genuine answer are the asset managers tasked with buying and selling securities.”

This paper proposes that asset managers are the people most likely to deliver a practical answer, as they are ultimately responsible for buying and selling securities. Some of the existing scoring systems fail to capture material financial issues. As a result, the accountability of managers and investors may decrease around these particular matters.

To avoid this confusion, not only it is necessary to clarify the role of the actors involved, but also the topics that should be included in. Instead of filling a one-size-fits-all questionnaire based on the industry, asset managers should focus on corporate governance and driving a dialogue that helps identify opportunities and risks together with the companies.

Another issue lies in the design of meaningful metrics. The paper recommends that all stakeholders collaborate in the designing process to balance sustainability and financial factors. A practical suggestion is to develop a more forward-looking-approach by linking ESG ratios to long-term systematic risks.

Sustainable investment should not become a race among asset managers to meet the standards but a long journey to be accomplished by the asset management industry as a whole. Sustainable investing shouldn’t be driven by performance metrics, but by the performance itself.

Picture © NordSIP