In the investing world, there’s always a hot new narrative. The narrative typically takes the form of an innovative product, a sector rotation or an “inevitable” theme. One narrative that I’ve been particularly interested in for the past couple of years is that of ESG investing. Environmental, Social and Governance (ESG) is the discipline of investing for financial return without sacrificing for social impact. You have likely come across different terms and acronyms that mean pretty much the same thing: Sustainable Responsible Impact (SRI), Strategic Sustainable Investing (SSI) and Impact Investing, just to name a few. If the acronym seems vague, and maybe even a little arbitrary, it’s because it is.
While the potential for this investing theme to become a dominant narrative makes sense – after all, who wouldn’t want to make money AND save the environment, there are a few key hurdles that have made ESG solutions more about potential than impact.
First, the measuring of the ethical impact that a single company can have on society and/or the environment is not only a pretty daunting task but also one that is very personal. For some industries, such as tobacco or gun producers it’s pretty straightforward, but for others, it can be a pretty slippery slope. What’s important to one person may not even be on the ethical radar of another, and this makes standardization of products extremely difficult. Second, can you really make money?
The entire premise of ESG is based on the view that you can have both financial and moral returns. That you can make money without sacrificing for your own values by financially supporting companies that are adopting practices that you deem questionable. But if no businesses are without some questionable practice across their entire operations than the addressable universe of companies to invest in becomes zero. While the example is extreme, the fact remains that ESG is about both the investor allocating dollars and the companies they invest in adhering to a new world where sustainability and social impact matter.
This seems like a classic ‘chicken or the egg’ problem; investors won’t sacrifice returns in any scale and companies will operate to maximize shareholder value. But more so, it’s a cycle that can only be broken by investor demands on companies, in scale, through intermediary and institutional channels. I’m picking now to write about a topic that I’ve been following for years because I believe that it’s actually starting to happen.