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No Such Thing as “ESG Investing”

ESG analysis is the essential discipline

As public awareness of so-called “ESG investing” grows, regulatory and media attention has followed. Recent headlines have highlighted questions regarding the validity of integrating ESG considerations into investment decisions as well as the usefulness of the data. In this article, I will offer an overview of a critical philosophy regarding the role of ESG analysis and how it ought to be applied to the investment process.

We should first state that there is no such thing as “ESG Investing.” Period. There is, however, such a thing as “ESG Analysis.” This is an essential investment discipline.

Man sitting in abstract environmentESG is not an asset class, it is not a style, and it is not a strategy. Again, simply stated, it is an investment research discipline. It need not be politicized, divisive, or represent any particular ideology. In fact, when it is used that way, it is entirely disingenuous and outright false. To those individuals, we would ask them to stay in their lanes. We would also ask why, in their own investment analysis, they would not want more information rather than less? Why would they not want material data that could help better analyze risk-adjusted returns? Why would they purposefully obfuscate something that is blindingly obvious to serious investors? Had the dinosaurs known that a big asteroid was coming, might they at least have tried to put on a sweater?

Moving on and reiterating, the term Environmental, Social and Governance (ESG) describes an analytical approach. This discipline is an integral and essential part of comprehensive and thorough investment research. The focus of ESG analysis is to 1) identify and evaluate material environmental and social considerations that may influence investment performance; and 2) assess whether the relevant governance structure of a company or a fund strategy (and the underlying public or private investments) are properly equipped and motivated to govern effectively. ESG analysis enhances the insights provided by the most traditional, fundamental financial analysis. It does not imply a value judgement. So, if you are researching a beverage company or a semiconductor company, wouldn’t you want to know their access to water? If you are about to invest in a manufacturing or shipping company, wouldn’t you need to understand their safety protocols? And if you were looking at a mining company, wouldn’t an understanding of their community relations be critical? In each case, we are talking about a company’s fundamental business operations. Did I say “ESG?” No. And I need not. It is just about good investment research.

The risk of not conducting integrated ESG analysis across securities, managers, sectors, regions, and the capital markets is tremendous.

And for those who are fiduciaries and stewards of wealth, it is absolutely critical to take a thoughtful and well-researched approach to making investment decisions. The approach considers quantitative data, engages in qualitative evaluation, and leverages deep and experienced teams to make decisions. Each investment decision requires an investor to form a judgement based on the available information relative to their risk profile and goals. But not all information is created equal. A successful investor sifts through the noise and identifies information that is material to driving investment outcomes. There is unlikely to be a single piece of ESG data that is sufficient to base an investment decision. Rather, they are starting points for further inquiry.

Big hand pointing at walking man

To reiterate, identifying material information encompasses traditional fundamental financial data, macro-economic factors, thematic research, and ESG considerations. The importance of each of these factors in an investment decision will vary in each case. But all factors are evaluated in the pursuit of improved returns and risk management. This focus on materiality is critical to investment success and should be inclusive of ESG factors. Failure to examine material impacts to investments may expose investors’ portfolios to unnecessary risks and result in missed opportunities. As an obvious example, climate change represents a material, systemic risk for investors, systemic financial risk to the financial market, and has recently been identified by the SEC as material risk that companies must disclose to investors. The risk of not conducting integrated ESG analysis across securities, managers, sectors, regions, and the capital markets is tremendous. And finally, for those who wish to invest in alignment with their personal values and missions, while at the same time pursing competitive financial returns, the discipline of ESG analysis is the critical starting point for further inquiry. Having more information rather than less is indeed blindingly obvious.

Erika Karp on Understanding Complexity and Systems Change

Erika Karp is Executive Managing Director and Chief Impact Officer at Pathstone which advises on $40B of assets for Families, Foundations and Endowments. Prior to this, Erika was the Founder and CEO of Cornerstone Capital Group which merged with Pathstone in 2021. Having spent over 30 years on Wall Street, ... Read more
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