The term ESG has become a “catch-all” used to describe a wide variety of investment outcomes and is not helpful for clients, says Mirza Baig, global head of ESG investments at Aviva Investors.
But if the term ESG is so widely used as to be meaningless, and as both HSBC and Deutsche Bank get into hot water over their responses to ESG, how can a client ever have a diversified exposure?
Despite the strong inflows and performance of ESG-related mandates over the past three years, the latest data from the Investment Association indicates ESG mandates account for less than 6 per cent of the total assets under management of the UK open-ended funds universe.
However, the direction of travel seems to be clear, as that 6 per cent represents a tripling of market share in around five years.
But one of the major challenges is that many companies comply with only one of the aspects of E, S, or G, rather than all at once.
For example, Tesla’s contribution to the environmental cause is unquestioned, but with a chief executive who runs several other companies and is using his Tesla shares to raise debt to buy Twitter, it is possible it would fail on governance grounds.
Similarly, while solar panels are undoubtedly a popular and valuable contributor to the portfolios of those whose priority is climate change, most solar panels are made with a component called polysilicon, where 90 per cent of the world’s supply of this is in the Uighur region of China where international organisations have highlighted human rights abuses, meaning some solar panel producers may not meet the social S criteria in ESG.
So, does ESG have a future in its current iteration?
Evolution of ESG
Adviser and indeed media professionals in our industry have been deluged with content from fund houses about new launches of ESG products, complete with tales about the rich heritage of the particular business in ESG investing, despite it being a relatively nascent asset class.
The term ESG is in itself an evolution from the original 'ethical investing' concept, which focused on simply excluding companies that did harm and so was very subjective.
ESG was supposed to provide more clarity while also creating bespoke definitions around ethical sustainable and impact funds. But that created new challenges, as many companies correspond to some but not all of the criteria.
But for Vikash Gupta, chief executive of Var Capital, the evolution has happened too quickly and this is creating issues, as many clients may be seeking exposure to ESG as it was, while seeing an evolution into new areas, which may be confusing the issue and taking it away from the core of ESG as understood by many clients.
He says: "ESG has evolved from an area of wanting to do ‘better’, led by the conscientious, to a world of risk management and a reputation, recruitment and investment tool for corporate boards. Whenever a new innovation in the finance world becomes trendy, typically, it evolves so quickly that it becomes problematic.
