‘Don’t confuse ESG with sustainability’

While use of the term ESG – environmental, social, and governance – has continued to gain traction in financial services circles, one professional has urged advisers to tread carefully regarding its application.

Namely, founder and chief executive officer of Ethical Invest Group, Alexandra Brown, told ifa that people often confuse the relationship between ESG and sustainability.

“I think that ESG factors overlap with sustainability factors, but ESG doesn’t mean sustainability,” Ms Brown explained.

Ms Brown told ifa in March that she was not using ESG investing as a term. She explained at the time that she preferred using sustainable investing, and that ESG integration is essentially about risk management whereas sustainable investing is about targeting themes that could have a positive impact.

Since then, Ms Brown has asserted that she remains loyal to sustainable investing.

“I’m still not using the term ‘ESG investing’,” she told ifa this week.

“I appreciate when other people do. I don’t mind other people using it, but I’ll ask questions as to what they think that they are referring to when they say ‘ESG investing’, just to see what their understanding is – whether it be a product or a person using that term.”

Ms Brown said she continues to observe a discernible knowledge gap, among both advisers and clients, when it comes to the definition of the different approaches to responsible investing. It is here, she explained, that this blurring of lines can occur.

The full scope of responsible investing methods was mapped out in RIAA’s responsible and ethical investment spectrum, which covers various approaches to responsible investing, their similarities, differences, and areas of focus.

Namely, the spectrum defines “ESG integration” as something that explicitly includes ESG risks and opportunities into financial analysis and investment decisions based on a systematic process and appropriate research sources.

While ESG integration avoids harm, according to RIAA, it doesn’t benefit stakeholders or contribute to solutions.

On the other hand, “sustainability-themed investing”, which is defined as specifically targeting investment themes such as sustainable agriculture and green property, avoids harm while also benefiting stakeholders and contributing to solutions.

Ms Brown explained that she prefers to use the term sustainable investing, or responsible investing, because it has a globally recognised definition.

“There’s still no global definition of what ESG investing is,” she explained.

“So ESG itself can be taken a number of ways: it can be used as just an abbreviation, a simple abbreviation meaning ‘environmental, social, and governance’ factors, it can be used as an adjective or a descriptor. So, you’re looking at things like ESG ‘risks’ or ESD ‘opportunities’.”

Reaching a global consensus on ESG

Moreover, Ms Brown believes ESG needs to be kept simply as an acronym, so as to minimise confusion.

“I’m just of the opinion, why don’t we just keep it as an acronym? Why do we have to define it as an investing approach or an investment umbrella?” she asked.

“I just don’t see the point of short handing it and making it this globally recognised definition when we already have that in place.”

Ms Brown suspected that the reason why ESG has become such a popular term is because of both its presence in the media and also in “everything we do”.

“Advisers and investors … they want to bring it into the vernacular, but they’re not quite fully equipped to understand the different nuances.

“So, I don’t think ESG investing as a term is going to go away. But maybe if we can just help advisers and investors realise the broader understanding of that, of that acronym, and the underlying meanings.”