The use of words such as 'externalities', 'extra-financial risks' and 'socially responsible investments' often results in the perception that environmental, social and corporate governance (ESG) factors are extraneous to conventional investment decision-making, that they are extra work, and that they are only about ethics. This has turned the integration of ESG factors into a niche and has given mainstream investment managers an excuse not to be explicit about ESG factors in their investment processes.
The ESG community can borrow from general sustainability research. A recent report by advertising agency OgilvyEarth showed that the communication of sustainability in general should be rethought. "The great green middle, (79% of Americans), isn't looking for things to set it apart from everyone else. It wants to fit in."
Likewise, there is still a social stigma associated with ESG that links it with tree-huggers. When you put 100 portfolio managers in a room, very few want to be the odd one out saving the planet. The more we communicate ESG analysis as somehow different from regular investment analysis, the less it will be adopted.
The ESG community is comprised of many green leaders, but to be successful we must realise that the majority of investors are not motivated by ideals to save the planet: they want to know what's in it for their investment thesis. It is our task to insert ESG into that and in doing so help investors to better value "green companies" without resorting to suspect language as sustainable investing or SRI.
How can the ESG community fix its communication error?
Speak portfolio manager language: less Greenpeace, more Goldman Sachs. To be heard and influence someone, you need to speak the language of the other. For instance, do not speak about water usage or carbon reduction, but show a financial analyst the risk of water scarcity on a company's future cost of capital and balance sheet. Saving the planet may not be a manager's fiduciary duty, but analysing material information is.
Show the upside. A lot of what ESG advisers do can be summarised as change management. Changing people works best when you show them the upside. So to have investment managers include ESG information speak in terms of how ESG information adds value. Show how solving environmental and social trends results in new value creation opportunities, instead of scaring people about global warming. For instance, according to McKinsey, a transition to a circular economy is an economic opportunity of $630bn.
If the ESG community is serious about saving the planet, we should first make ourselves understood and stop communicating that ESG analysis is exceptional. Undoubtedly, communication alone will not solve all environmental and social problems, but some form over substance may help to bring about a sustainable financial system.
Source: The Guardian