Sustainable ESG (Environmental, Social and Governance) investing requires, by its very definition, a robust and sensible approach. No investment that purports to improve the world can be made without a full appreciation of historical context, the current environment, and potential effects. To fail to take such considerations into account would be a fundamental failure. Doing so is not simple or easy, but is made possible with the incorporation of reliable information gleaned from trustworthy sources.
It’s unfortunate, then, that so many have been able to point out a deficiency in reliable data to underscore important ESG initiatives. This past November, Erika Fry of Fortune put together a worrying collection of quotes from a conference of women investors at the forefront of the burgeoning sustainability movement. Their reports tell a troubling story: that there is much uncertainty surrounding ESG, which is precisely the kind of risk that savvy investors steer clear of.
BlackRock managing director Heather Loomis Tighe even stated at the conference that her company has eliminated use of the “ESG” phraseology entirely, preferring to call it “sustainable investing.” That the skepticism surrounding ESG’s data would result in a leading global firm’s banishment of the term demonstrates two things: that this sort of investment has been colored by a great deal of negativity, and simultaneously that BlackRock has not taken this as a sign to stop conducting it. Instead, they’ve only put what they feel is a more respectable name on it.
Tighe elaborated: “If you were to sit in front of an investment board and say, ‘There is an economic factor that is holding back from unlocking from 2 basis points to 2% of return on a consistent basis, would you like to explore it?’, the answer would be a resounding yes…When you sit in front of an investment board and say, ‘We’d like to take ESG into account,’ the response is no longer so resounding.” These are worrying words from a leader in the world’s largest asset management firm.
It’s a difficult fact to confront, but the reality is that ESG investing as it currently exists relies on a good deal of faith from those who choose to get involved. It goes without saying that it’s unlike traditional corporate investments–there are no annual reports, no risk assessments from the usual suspects, and no standardized form of accounting. The pinpointed nature of many ESG investments (such as helping rural farmers or boosting seed-level renewable energy startups) makes it highly nontraditional, meaning there isn’t nearly as much information at hand as there would be for, say, an investment in General Electric.
Big data has changed the investment game for good: investors, rightfully so, require the kind of deep understanding that’s provided by cutting-edge data analysis. Major companies have kept detailed records for years, and with every advance in technology most have smartly kept up the pace. When investors can feel that their money is being responsibly allocated, they’ll continue to make those allocations. The presence of reliable data makes investments both large and small justifiable, while the absence of such is a stark red flag.
What it all comes down to is transparency. Investors who would otherwise jump in with both feet are instead staying clear of potentially revolutionary ESG ideas because they simply can’t justify the outlay. The absence of proven data makes this a sadly simple choice. While supporting rural farmers philanthropically is great, to merge their work with the investment sphere creates better long-term potential. But these farmers likely aren’t using Sisense’s BI or IBM’s Watson to track their sustainable crops.
That doesn’t mean they can’t in the future. To empower the smallest ESG operators might be considered an investment, one that helps not only individuals but the wider landscape in which they’re operating. I’m not suggesting that philanthropy should be a major driver of investment, but the goals of sustainability mesh in such a way with those of the world as a whole to make it an appealing prospect. It’s a leap of faith, sure, but it’s one way that we can make ESG more palatable moving forward.
All of the uncertainty surrounding ESG likely amounts to growing pains. As this mode of investment grows in popularity we can expect regulatory bodies to respond with more comprehensive filing requirements and reporting that replicates the rigor we find in more traditional publicly traded companies. By that time, we can hope that sustainable investment will be recognized as the win-win proposition it deserves to be.
ESG investing has been one of the most promising and positive movements of the last several decades, but clearly it’s one that is still working out the kinks. By taking steps to ensure that the underlying data is present and accountable, investors are more likely to respond positively. At that point, real change is possible.