As soon as you start looking into sustainable investing, you get bombarded with jargon: ESG, SRI, CSR… As an investor, you have all the rights to know exactly what you put your money in. You have all the rights to demand more clarity and concreteness from your bank, investment platform or wealth advisor.
In this article, we will make sense out of the common frameworks and strategies in sustainable finance with some colorful examples. So you will know what to look out for as well as the right questions to ask. Remember, informed means armed.
In itself, ESG is nothing more than a framework to assess company’s performance. It stands for Ecology, Social and Governance. We know that companies have an extensive impact on our lives that extends well beyond the company’s business operations per se. The ESG framework is designated specifically to assess how a company stands in regards to E, S and G, – the dimensions of an environment the company operates in.
In more formalized terms, ESG is used as a framework to access how a company manages risk, related to the broader environment it operates in. ESG is set to systematize and disclose such risk measures.
Would that mean that ESG stands for “all the good things, and against all the bad things”? Not at all.
An informed investor should understand that big companies can create an ESG “smokescreen”. There are ESG experts knowing all the specific “checkboxes”, thresholds and technicalities a company needs to fulfill, in order to have a good standing with sustainability and ESG rating agencies (e.g. Morningstar, MSCI). The companies can spend large budgets to hire such specialists and promote their activities in a favorable light, putting themselves forward as progressive and sustainable.
Have you noticed how petroleum, tobacco and gambling companies have hundred-pages ESG reports? If you want to get to the bottom of a company’s ESG performance, you will need time and ability to filter the noise. Don’t get discouraged because we are glad to support your journey.
In the following materials, we’ll drill down into how ESG applies to investing, and what are the common ESG investment strategies.
