What is ESG? Does anyone really know?

According to PWC’s report Mind the Gap: the continued divide between investors and corporates on ESG shows there is a communication gap between what investors think is included in the term ESG and what investment firms categorise as ESG.

Every investment firm will have different criteria when it comes to how they measure companies or funds’ ethical status. Some positive screen, some negative screen, some invest in companies they disagree with in order to use their power as a shareholder to enact change. All of these methods are legitimate in themselves, but the complexity lies in whether those individuals investing in the ESG funds that the investment firm offers understand exactly what they are investing in.

More often than not, they probably don’t.

Evidently, it’s hard to be black and white when it comes to ESG. With so many issues on investors’ radars not all companies will perfectly fit the bill. For example, a company may be making great progress in the transition to net zero but the diversity on their board could be less than ideal. So where one investment firm may disregard said company from their ESG fund, another may include it.

As highlighted in the event there is still no real industry consensus as to what ESG means and this can be a challenge for investors, particularly those that don’t want to actively manage their portfolios and do their own detailed research into what they are investing in.

The optimists among us will want to believe that every investment house with an ESG badged portfolio has a strict criteria and is doing their upmost to ensure the companies in which they invest have the highest of scruples. In contrast the more sceptical of us will consider that some aren’t as strict as might be expected. As one speaker at our event said it’s becoming as much about the ‘brand ESG’ than just ESG.

Of course, the majority of investment firms out there have both good intentions and criteria for their ESG investments that reflect them. The trick for those firms continues to be communication. How do they stand out in an increasingly noisy space? Indeed, according to Morningstar, there were 333 new sustainable offerings launched in 2020 alone.

Investors need clear and transparent information in order to make informed choices. We need to know what we are investing in and why those companies have been chosen for their ESG credentials. The firms that can truly define what ESG means to their investments in a clear way will ultimately win out.

So, in many ways, it doesn’t matter that our definitions for ESG aren’t the same, what matters is that as investors we are given the information to make informed choices. So, if you’re still scratching your head trying to work out what ESG is all about, don’t worry - as long as your own values align with those companies you are investing in you’re on the right track.