Don’t confuse ESG with being green’
Writing in the Financial Times, Stuart Kirk said that ESG was suffering from an “existential defect”
Don’t confuse ESG with being green’
Monday September 05 2022, 12.01am BST, The Times
Stuart Kirk believes there is confusion over precisely what ESG means
A failure to recognise the dual meaning of environmental, social and governance investment is preventing the approach from thriving, according to HSBC Asset Management’s former head of responsible investment.
Stuart Kirk resigned from HSBC in July after he was suspended following a presentation he delivered at a conference, entitled: “Why investors need not worry about climate risk”.
Writing in the Financial Times, Kirk said that ESG was suffering from an “existential defect” because the approach has had “two meanings from birth”, which regulators have never bothered distinguishing. The result was that “the whole industry speaks and behaves at cross purposes”, he said.
IN YOUR INBOX
Business briefing
In-depth analysis and comment on the latest financial and economic news from our award-winning Business teams.
Sign up now
One meaning, which is how portfolio managers, analysts and data companies have understood ESG, is “taking environmental, social and governance issues into account when trying to assess the potential risk-adjusted returns of an asset,” Kirk said. However, this approach is different from investing in ethical or green or sustainable assets, a second meaning that most people use when thinking of ESG, he said. “They prefer a company that doesn’t burn coal, eschews nepotism and has diverse senior executives,” Kirk wrote.
The first approach considers E, S and G as “inputs into an investment process”, the other as outputs to maximise impact, a conflict that has led to “myriad misunderstandings”, Kirk said. From an input perspective, it is permissible to own a “a polluting Japanese manufacturer with terrible governance” if these factors are considered less material than other drivers of returns, or that risk has been factored into the share price by investors. “But try telling that to a Dutch pension trustee with an ESG-output focus,” Kirk wrote. From an ESG-input perspective, there is also no such thing as so-called greenwashing because sustainability is not the ultimate point. It is equally unfair to accuse funds that take an ESG-output approach from greenwashing since there is no agreed measure for green, Kirk wrote.
The dual meaning attached to ESG also makes fund reporting harder, he wrote, because while asset managers are constantly asked to show that their ESG portfolios have a better average ESG score than the index, “for funds where ESG is just an input, any score without reference to valuation is meaningless”. The solution put forward by Kirk is to split ESG and establish a designated range of ESG-input funds.
Funds that take an ESG-output approach must be more honest about “the trade off between returns and ‘doing good’ ”, Kirk said.
https://www.thetimes.co.uk/article/dont-confuse-esg-with-being-green-fz59dmx7h