Ged Carroll

ESG in a nutshell

Published: (Updated: ) in business | 商業 | 상업 | ビジネス, economics | 經濟學 | 경제학 | 経済, ethics | 倫理 | 윤리학, finance | 은행업 by .

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What is ESG?

ESG can be considered to be a form of ethical investing. Ethical investing of one form or another has been around for a while. In the US by the middle of the last century union pension funds were looking to invest in areas like affordable housing. There used to be funds and banks that wouldn’t invest in certain industries, such as tobacco or arms manufacturers. The Cooperative Bank in the UK screens business banking clients looking at issues such as animal welfare and supplying arms to oppressive regimes.

ESG or environmental & social governance can be seen as a way of standardising ethical investing and has been adopted by the US financial services sector. Environmental factors have been raised in importance due to concern about climate change. ESG as we now know it came out of the UN Principles for Responsible Investment which financial institutions signed up to. This happened in 2005 and by 2016 it became a ‘hygiene factor for asset managers as requests for proposals required being a UN PRI signatory.

PRI funds under management
The growth of interest in ESG can be seen by the amount of funds under management over time complying with PRI framework

The PRI is based around six principles

There is no consensus when it comes to ESG ratings
Correlation data on ESG ratings via Schroders analysis 2021

Why do investors use ESG?

ESG investing is considered to be a form of risk management

The rationale being that ESG aligns with companies there that are prepared for risks that other companies miss. However it is based on a fallacy that other people are stupid, rather than the risks not matching their client’s investment horizons.

Companies that have embraced sustainability are doing better

This is based on a perception that ‘virtuous investments’ as a strategy tend perform better than sinful ones. Yes there are a number of businesses in this category. Sinful companies can do well as well, and ESG investment funds don’t necessarily outperform their rivals.

An altruistic desire to drive down the cost of capital for green businesses versus their incumbent competitors in the carbon economy

Going down this route requires an admission that this might not outperform as an investment and won’t be a substitute for political, legal and regulatory action to spur economic greening.

ESG Earthquake

On August 2, 2021, Tariq Fancy dropped a proverbial bomb on the ESG sector. He didn’t say anything that hadn’t been said before. But the way he put it together into a cohesive story and the authority he had to talk about ESG made an impact.

Fancy comes from a background in investment banking, private equity and fund management. Most notably he formerly worked for BlackRock as their global chief investment officer for sustainable investing. In other words, he knew the ESG investment business inside-and-out.

What I considered to be his most relevant points were:

More ethics related content here.

More information

Roberts, B.C., Trade Union Government and Administration in Great Britain (Harvard University Press, 1958)

Investment Division, Directorate for Financial and Enterprise Affairs, The UN Principles For Responsible Investment And The OECD Guidelines For Multinational Enterprises: ComplementarIties And Distinctive Contributions (OECD, 2007)

Porter, M.E., Serafeim, G., Kramer, M., Where ESG Fails (International Investor, October 16, 2019)

Fancy, T., The Secret Diary of a ‘Sustainable Investor’ (Self published, August 2021)