As the rise in growth of impact investing continues apace,
then so do the acronyms associated with all asset management. The latest to gain traction is ESG;
environmental, social and governance. Active investors are now demanding that
companies such as Amazon, JP Morgan and BP consider ESG issues more seriously
such as gender diversity, climate risks and the use of artificial intelligence.
What is interesting is that the demand is coming from the
bottom up and businesses and asset managers are having to respond
accordingly. The demand is also being
fuelled in some cases by other initiatives such as the Principles for
Responsible Investment, backed by the United Nations that promotes the
inclusion of environmental, social and governance factors in asset allocation. The
European Commission is also actively trying to channel more capital into
sustainable funds by incorporating ESG principles into key regulations and
forcing fund managers to show how they integrate them into investment
Of course, not all countries take the same view. In America,
President Donald Trump’s scepticism about climate change means there’s no
federal support. Indeed, the Department of Labor last year said fiduciaries
should “not too readily treat ESG factors as economically relevant.”
So, is it all Good
In general, it has to be a step in the right direction, but
it is still very early days to assess any real impact on investment
performance. Establishing the right criteria for ESG and then determining a
common way of measuring it is currently a challenge. Until a universal measure
is found then it will still be open to scrutiny and throw up contradictions
such as The Dow Jones Sustainability Europe Index including cigarette purveyor
British American Tobacco and oil giant Royal Dutch Shell featuring in
Vanguard’s SRI European Stock fund.
What’s the difference
between ESG and Impact Investing
A growing number of investors want to see their money go
toward stocks or funds that are both profitable and reflective of their social
values. Three styles of investing fulfil this: Environmental, social and
governance (ESG), socially responsible investing (SRI) and impact investing.
ESG looks at the company’s environmental, social
and governance practices, alongside more traditional financial measures.
Socially responsible investing involves actively
removing or choosing investments based on specific ethical guidelines.
Impact investing looks to help a business or
organization complete a project or develop a program or do something positive
to benefit society.
While there is an element in crossover with some of the
above, it does give the investor a degree of choice as to the level of their ethical
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