Private equity data provider Pitchbook is out with an interesting look at what investors think of environmental and social governance (commonly known as ESG). Before looking, what would you guess are investors’ top concerns? Here’s a look.
Sentiment #1: ESG is Subjective, and ESG Performance is Difficult to Substantiate Through Measurement and Comparison
The first sentiment is as follows:
“ESG is increasingly difficult to measure and frequently involves greenwashing. We appreciate companies pursuing environmental objectives but find the S and G components are too subjective and not accurately reported.” – from a Limited Partner in North America
Overall, the argument is that ESG is too subjective to draw real diagnoses from the different ESG “doctors”. Of course, one might draw the conclusion that there are both good and bad aspects of the subjective nature of ESG. On the one hand, ESG offers the ability of any private market participant to theoretically find an approach to ESG that is palatable and customizable to them. On the other hand, ESG may equate to misaligned expectations and difficulty in distinguishing between the different ESG approaches of fund and asset managers and benchmarking them against each other.
Sentiment #2: ESG Requires Sacrificing Returns and Constitutes a Breach of Fiduciary Duty
The second sentiment may be summed up in the followed statement from a limited partner in North America:
“I have no desire to betray my fiduciary responsibility and sacrifice returns for the sake of promoting leftist political ideology.” – from a Limited Partner in North America
According to Pitchbook, some analysts may consider this based on misinformation in that some argue that ESG does not require investors to sacrifice returns for the sake of creating positive social or environmental outcomes, sometimes referred to as “accepting concessionary returns”. Of course, others might argue that it’s clear that ESG implies accepting potentially lower returns if the ESG scores imply such a management decision. Overall, whether following ESG policies leads to sacrificing returns ultimately depends on how an asset managers decides to implement ESG investing.
Sentiment #3: ESG is Redundant Because it is Already Part of Best Practice
The third sentiment is summed up in the following statement:
“ESG is dogma – it goes without saying that all organizations must have continuous improvement initiatives in all aspects of the business.” – from a Limited Partner in North America
Overall, this view may or may not be accurate depending upon how an asset manager is implementing ESG investment policies and frameworks. If ESG is simply following the law, treating employees fairly, not damaging land, not harming consumers, and preparing for when things go wrong, then ESG may add little value. Others argue that ESG is more than that. And, the answer is really – it depends.
Summing Up
Overall, based upon survey respondents’ perspectives of ESG, the usefulness of the practice may be questionable at best, although the real answer to that question depends mostly on one’s broader philosophical view of environmental and social governance.
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