Now that you have the rundown on what ESG is, you may then ask whether ESG investing makes a difference. Does ESG live up to its mandate and improve the world in some way, small or large? The best way to gauge success is to measure it. Think of the satisfaction you feel when the dial on the scale flickers back and forth and comes back to rest to the left of where it was the week, month, or year before as a result of those extra trips to the gym. Unfortunately, measuring the results of ESG investing is not as black and white as the numbers on the bathroom scale.
ESG is not one size fits all and there are numerous approaches to its implementation. One way is to integrate ESG criteria alongside other factors in portfolio construction. Another option is to apply exclusionary screens that align with one’s values or faith. Impact investing might be a good fit if driving change is prioritized above just financial return. Within these three main categories, there are innumerable nuances.
The many approaches to ESG make it difficult to use a standard rating system or scale to evaluate its impact. To continue the alphabet soup analogy, imagine trying to corral all those letters onto your soup spoon and have them line up and face the right way so you could measure them. Now picture (pardon the absurdity) a group of commercial index providers, non-profits, and government entities crowding around the bowl and bringing their own home-grown measuring sticks. MSCI, one of the largest global index providers, alone has over 1500 equity and fixed income ESG indexes. With so many players and no two methodologies that are the same, it is hard to get a clear picture of how one ESG investment might compare to another.
The good news is that this shortcoming is being addressed. Most recently a group of entities, including the Ford Foundation and S&P Global Inc, came together to launch Novata Inc., a central database to gather, report, and benchmark performance around ESG metrics. Regulators are also recognizing the need for standards and the SEC is considering whether to require disclosure of ESG criteria and the data used. There is also a growing trend for organizations to tie executive compensation and performance incentives to hitting ESG targets. A recent Willis Towers Watson Global Executive Compensation Analysis Team (GECAT) found that 51% of US companies and 45% of UK companies used ESG metrics in their incentive plans; however, these incentive plans are not immune from the broader issue we have been discussing that metrics are often applied very subjectively.
While there are certainly challenges today in objectively answering the question, “Will my investing in ESG make a difference?”, progress is being made. It is incredibly difficult today to objectively measure the results of ESG factors. Every indication is that this will likely change, and change sooner rather than later, as the conversation around ESG grows louder every day.
Greenspring provides ESG options for clients aligned with our overall investment strategy of focusing on low-cost, globally diversified portfolio. If you have an interest in learning more about ESG investing contact us today.