The flaw is that ESG has carried two meanings from birth. Regulators have never bothered disentangling them, so the whole industry speaks and behaves at cross purposes. One meaning is how portfolio managers, analysts and data companies have understood ESG investing for years. That is: “taking environmental, social and governance issues into account when trying to assess the potential risk-adjusted returns of an asset.” Most funds are ESG on this basis. Weather, corporate culture or poor governance always influence valuations to some degree.
But this approach is very different to investing in “ethical” or “green” or “sustainable” assets. And this second meaning is how most people think of ESG — trying to do the right thing with their money. They prefer a company that doesn’t burn coal, eschews nepotism and has diverse senior executives.
Two completely different meanings then. One considers E, S and G as inputs into an investment process, the other as outputs — or goals — to maximise. This conflict leads to myriad misunderstandings.
Source: Stuart Kirk: ESG must be split in two | Financial Times
