For those who prefer “give it to me straight” over “beat around the bush”, we offer this opener from a recent article about misconceptions about ESG investing, published by GreenBiz: “The market demands ESG discipline, period. Whether you view ESG as the alpha and the omega, an opportunity for capitalism to atone and course correct, or as a Trojan horse for a woke agenda, this fact is a stubborn one.”
After that razor-sharp observation, the article goes on to point out some of the criticisms and misconceptions that plague ESG investing. We believe it is important to address these issues head-on, rather than taking an attitude of, “let’s move on, there’s nothing to see here” – in fact, we think it is essential to the long-term success of sustainable investing.
One well-known critique (a three-part series) was offered by Tariq Fancy, BlackRock’s first chief investment officer of sustainable investing. If you have not already read it, Fancy takes a cynical view of using ESG as an investment tool. Although we disagree with a good deal of what he says and believe that his description of how ESG investing is done is outdated, this GreenBiz article notes that Fancy raises some legitimate issues.
The article also fairly (in our view) points out that ESG investing can be challenging–or perhaps better said, requires flexibility–when a crisis such as Russia’s invasion of Ukraine occurs and addressing the crisis violates one or more ESG principles.
Through an interview with Alison Taylor (executive director at research organization Ethical Systems, advisor to BSR, and adjunct professor at NYU Stern School of Business), GreenBiz does an excellent job of telling it like it is when it comes to misconceptions about ESG investing, which is related to why we disagree with some of the premises that underly Tariq Fancy’s criticisms.
Ms. Taylor observes that ESG coverage in the media “tends to treat the issue as a boxing match between free market advocates who think this is all a dangerous effort to manipulate us, and people who imagine that ESG will save the world.” We agree that much of what is written about ESG investing seems to come from either hardened skeptics or passionate evangelists. Ms. Taylor rightly (again, in our view) points out that many academic studies on whether ESG is linked to financial performance appear to exhibit confirmation bias – in other words, the researchers found what they were looking for a priori.
According to Ms. Taylor, the biggest misconception about ESG investing is that “there’s a universal thing called ESG…” The truth is messier. In addition to philosophical disagreements, there is no single ESG strategy, no globally accepted ratings methodology or measurement approach – even the ultimate goal of sustainable investing is not settled.
Ms. Taylor goes on to challenge a view that has been expressed by many sustainable investing “experts”, namely that ESG should not be confused with ethics. She notes that many asset managers say that ESG is not about being more ethical; it is about better identifying social and environmental risks. But, she says, by the time an environmental or social issue has become enough of a risk to damage financial performance, it’s too late. Companies need to start with ethical behavior and treatment of stakeholders.
At OWL ESG, our data and analytics are designed to help investors and companies make progress toward their sustainable investing goals. We agree there are many misconceptions and biases in this space and believe that seeking one-size-fits-all definitions and strategies is not the way forward. Contact us to learn more about how OWL ESG’s tools can deliver what you need to deal with the messy but exciting and uplifting challenges ESG investing presents.