IPFI Issue Brief: Defining ESG – Clarifying the Myths and Facts

With efforts underway by the Department of Labor and other government agencies to address Environmental, Social, and Governance (ESG) investing in pension plans and other investment products, the topic has garnered significant attention over the past several months. Given its prominence, it comes as a surprise that this investment strategy remains ambiguous and lacks a standardized definition.

In a newly released issue brief, IPFI examines the history behind ESG investment strategies, the variations in how ESG is defined between different firms, and how the financial industry can come together to establish a uniform set of standards.

As noted in the issue brief, “Since the acronym’s first use in 2005, ESG has become a widespread term in the finance world. Although there are over $20 trillion in ESG assets under management, it lacks a standardized definition under which all firms can unite and under which regulators can address legitimate concerns. Most definitions, however, use certain strategies to define ESG on an individual level. Some firms make more of an effort than others to define ESG and demonstrate their commitment to ESG investing.”

This analysis comes at a prescient time, in which the benefits of investment strategies that prioritize alternative goals to financial return are being debated across government, the financial sector, and, most importantly from our perspective, pensions. IPFI has long pushed for the principle that while individual investors should be free to choose whatever strategy best meets their needs, the fiduciary duty which is the cornerstone of pension fund management must always prioritize maximized returns with reasonable risk above any other political or social considerations.

According to IPFI President Christopher Burnham, “ESG investments should be made when they add value to a fund. When such investments will not improve the financial performance of the fund, or the decision to invest in them is based on political motives, they should be forgone.” The first step toward ensuring this principle is to set a common understanding of how ESG standards are defined and put into practice.