- Date : 02/12/2022
- Read: 3 mins
ESG investments would represent over a third of the asset under management projected total.
The global economy is fueling income inequality, stakeholder capitalism, and climate change, and it is up to ESG (Environment, Social, and Governance) to decarbonize it. However, ESG is a complex interconnected web and has been subjected to moral binaryness. The ILO (International Labour Organization) suggests that around 50 mn people worldwide are in modern slavery daily. Credit Suisse Global Wealth Report suggests that the richest 1% in the world (with over $1 million) have 45.8% of the global wealth. We can see the ESG industry at a crossroads in value creation, and a mature ESG is finding its way to a mainstream audience. It is where one promises to act and measure on a real-world-impact basis. The market wants ESG discipline from companies, regulators, investors, and consumers.
Less Is Sometimes More
ESG has become an open-ended term, and it can be a problem as it is not endless. It is essential to have focus areas to define the analysis framework. Diversity and climate action are at the top of the list of concerns for investors. New risks like humanitarian concerns and energy security are adding to the scope. Companies generally have four to eight primary issues, and knowing where to look becomes essential to win the battle. Investors having impact strategies or risk management can direct their efforts at particular aspects after understanding the attributes.
Exclusions with Caution
Exclusionary preferences will fall down the pecking order, and investors believe absolute exclusions mean passing the buck. Exclusions do not address the problem materially, and policy changes can be more effective in palm oil, weapons, alcohol, gambling, and nuclear exposure. Nuclear energy is generally on the exclusion list of fund managers, but the EU taxonomy recently added it as an environmentally sustainable economic activity.
Do Not Micromanage
There is an impact of multi-year engagements. Speak about concerned areas for a risk-based approach. Talking about opportunities, investors play a part in driving positive impact and influencing behavior on relevant issues. We must note that currently, the investors are facing pressure to disclose and measure the outcomes or engagements.
Go Beyond Numbers
We love to bring structure and pack data neatly as investors. Bringing objectivity to investments is another trait. However, focus on superficial screens are ratings take away the meaning of a truly integrated ESG. ESG factors are considered intangible, and we cannot measure them with numbers.
ESG's scope has evolved, and impactful solutions to improve and thrive are necessary for the market's demand. ESG investments shall not be subjected to be divisive, representative of binary ideology, or politicized. At the grassroots level, it is a movement that expresses solutions to challenges that affect employees, consumers, and investors—impact matters.