Think ESG is a marketing gimmick? You’re investing in the wrong place

Authored by Zoë VanderWolk, Head of Investor Relations & Sustainability, ETF Partners

It was perhaps inevitable that interest in environmental, social and governance (ESG) accelerated in 2021. This year, we’ve seen immense positives — Morningstar reported that ESG assets under management (AUMs) grew to nearly $2 trillion in the first quarter of 2021, as well as the introduction of the European Union Sustainable Finance Disclosure Regulation in March.

Yet at the same time, people are questioning the value of ESG investing, and whether the opportunities on offer are truly sustainable.

The ESG dichotomy

Perhaps to call it formal ‘questioning’ is a little unfair — very few people are publicly doubting the need for investing that supports real impact. What they are saying is that a lot of what’s marketed as ESG is really just gimmicks: oil companies appearing on supposedly ESG-focused funds because they’ve got a solar panel project or supporting the transition of power sources from coal to natural gas because, in comparison, the latter is better for the environment than the former.

It’s not hard to see why there’s this scepticism. There’s a lot of talk about ESG initiatives, whether it’s businesses seeking investment or investors purporting to run funds focused on impact and sustainability. Yet how many of them really want to change things? More often than not, they’ll be looking for ways to get the reputational benefits of having an ESG focus, while finding ways to do the minimum within the rules.

In a way it’s a bit of an odd dichotomy. People that operate like that clearly see the value in ESG, but they aren’t values driven. If they were, they wouldn’t be trying to maintain the status quo. Why? Because it’s the status quo that’s got us to this point, where we as a species need to change course now.

But “we need to make money”, the cry goes up. “If we make money then we can make change.” It’s a well hashed argument, and complete rubbish. Having an impact and making money are not mutually exclusive.

Why waiting is not a good investment strategy

Another argument is that the current situation is just talk, and real change will only come in when governments force regulation through that demands change. Yet this is passing responsibility from us as investors and as businesses, and waiting for governments, with all their other challenges and focuses, to make decisions on something that affects us all. If we do that, we are effectively saying that we will sit on our piles of money and wait until someone tells us what to do. As investing strategies go, it’s not particularly dynamic, nor one anyone would take if we were talking about a topic that wasn’t ESG related.

It also means we’re going to lose out on fantastic opportunities, because the truth is that there are many great businesses that are having an impact and making money for those willing to fund them. They are run by entrepreneurs and leaders who are building companies to solve major societal challenges. Isn’t that exactly the sort of approach we all preach, that no business can be successful if it isn’t solving a problem for a customer (even if the customer didn’t know they had a problem that needed solving)?

Finding the businesses having an impact

How do we find them? It’s about having intentionality, both as an investor (going out and finding the businesses really having an impact) and as companies (actually having an impact, not just thinking or talking about it); and it’s about being values driven and then aligning with those that have similar principles and focuses.

In all honesty, none of this is new. An investor focused on significant global growth would hardly back a company with limited international ambitions run by a founder happy to sell up and move on. Why is it any different with ESG? The opportunities are there; what investors need to be doing is looking under the hood, interrogating the data that claims to demonstrate impact, and working out whether what they consider to be a sustainable impact aligns with the business’ management’s views.

Looking under the hood for ESG success

Claiming that every ESG-focused fund or company is simply a marketing gimmick is at best short-sighted. Yes, there are those that dress things up to appear more impactful than they truly are. But the idea that ESG will only be profitable (and therefore somehow worthy of investor consideration) when governments regulate it so is ludicrous. There are so many great businesses having major impact in all walks of life; they’re looking for investors, and those of us that are prepared to hunt out the ones with similar values, that will interrogate their data and really look under the hood will be the ones that achieve that twin win of profit and societal benefit.

We create value by investing in and supporting great European companies that deliver Sustainability Through Innovation.