The term “ESG” – Environmental, Social, and Governance-based investing – was first used in an International Finance Corporation 2005 report Who Cares Who Wins and developed a widespread use in the following years. Currently, there is over $20 trillion in ESG assets under management and is a growing sector.
One of the key issues with ESG investing is that while it is seen as the right thing to do ethically, it is not clear whether it is the right thing financially. The performance of ESG-related investments has been widely questioned, and in a 2019 IMF report, it was found that there were comparable returns to traditional means of investment. Additionally, many institutions have created and formed standards around ESG, like the Sustainable Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). These actions have led to no prevailing standard. There is variation in many aspects of ESG and it has led to the sector being complex and not uniform.
All investment firms certainly overlap in their ESG definitions, but some go further than others in their commitment to describing exactly what that means and how they’re incorporating ESG into their decisions. On the base level, all firms describe ESG integration as the practice of incorporating ESG information into investment decisions – only some elaborate further.
Some firms, such as Schroders, acknowledge the haziness surrounding the precise definition of ESG. They explained that often “the most commonly used terms include “sustainable,” “responsible,” “impact,” and “ESG investing.” These are often used interchangeably to cover a wide spectrum of goals and strategies. Although ESG is distinct from SRI, there is some obvious overlap that many firms hesitate to distinguish between. Instead of pinpointing a solid definition, some firms, such as Shoroders, chose to view ESG as a spectrum where “At one end of the scale, ethical screens eliminate companies engaged in controversial activities, reflecting asset owners’ values and should have little expectation of improved investment returns. At the other end, sustainability analysis can, when approached thoughtfully and integrated with more traditional analysis, improve insights and enhance performance. Each approach has different objectives, requires different skills and demands different tools.”
Some firms, in lieu of defining ESG, dive deep into detail on how they will integrate ESG into their work. Most often, these firms include some form of “pillars” to convey their related corporate priorities. BlackRock, for instance, described three main themes around which they integrate ESG into their investment teams and strategies. The first is investment processes and they expect all active funds and advisory strategies to integrate ESG. They tasked portfolio managers with this task. Secondly, they use material insights in their ESG investments, and lastly they aim for transparency in their investments. Although BlackRock included a long description for how they integrate ESG into their work, they didn’t define ESG itself.
J.P. Morgan followed a similar approach of incorporating multiple elements into their ESG definition. Rather than choose their own pillars, they deconstructed the ESG acronym and individually defined “environmental,” “social,” and “governance.”
ESG has become a popular topic recently due to the possibility of restrictions being put into place by the Labor Department. The Labor Department Secretary, Eugene Scalia, said in June that the new proposed limitations would “remind plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”