Investment managers want consistent returns. But how compatible is that desire with the core tenets of ESG-led investment strategies?
This question has been raised consistently in recent years as companies launch “greenwashing” campaigns for PR and/or corporate branding purposes.
Now it’s time to get real. Here are two viewpoints that investors don’t talk about when they talk about ESG investing.
1) The Blind Obsession Behind the Need to Measure
The concept of measuring performance strictly by numbers has been consistently ingrained into money managers, who undertake investment decisions in the millions, if not billions, of dollars.
To these managers, measurement provides quantifiable means that determine success or failure, helping justify compensation and bonuses. To their clients, measurement provides the clear standards by which they hold their money handlers accountable.
Investors typically prefer stability, and stability stems from tried-and-tested familiarity.
Little surprise, then, that this entrenched practice has also permeated the realms of ESG investing. Investment firms just can’t help but feel a pressing need to “measure” the impact of impact investing. It is, after all, a form of investment, isn’t it?
That brings us to an interesting parallel about how city authorities curb reckless driving.
An all-encompassing measure for determining the “crime” is hard to track, so some cities do the next-best thing: target a single quantifiable metric, speeding, which can be easily captured by autonomous speed cameras.
Still, blind spots remain. Reckless driving consists of other factors that are hard to measure, such as lane swerving.
In a similar light, blind spots associated with so-called ESG metrics or benchmarks add to questions about their inherent reliability.
Smartkarma covered this issue in a previous case study on the MSCI India ESG Leaders Index: Of the top 10 leaders listed, five were found to be mired in scandals arising from a lack of internal governance. Or, as some sustainability advocates would say, missing the “G” in ESG.
Mindful of these revelations, should buy-side professionals then swing to the other extreme and ditch any attempt to measure ESG performance?
As with reckless driving, quantitative metrics still have their place in tracking factors that can be tracked. But perhaps they shouldn’t be relied on as the sole determinant of ESG worthiness.
2) Investing for Future Generations
French President Emmanuel Macron once said, “I believe in building a planet for our children that is still inhabitable in 25 years.”
While he spoke in context of the US’ departure from the Paris climate change agreement, his statement carries a direct bearing on ESG investment circles.
The longer-term benefits of ESG-led investment strategies may not be fully measureable in the years to come, but they will certainly endure in the decades ahead.
To that end, perhaps the very definition of an investment return requires an expansion beyond the commonly held view of a financial return.
Sustainable and responsible investment, also known as SRI, is already catching on among young millennials, who represent the next generation of investors. According to a Morgan Stanley survey, 75 percent of them in the US actually believe their investments could influence climate change, compared with 58 percent of the general population.
The fate of future generations and, to a larger extent, the human race, hangs in the balance of the investment decisions made today. Investment managers answer now not only to their client investors, but to a higher calling.
As Spider-Man’s Uncle Ben aptly puts it, “With great power comes great responsibility.”