Identifying a uniform definition of environmental, social and governance (ESG) investing is, of course, a major industry sticking point, but it didn’t prevent a panel discussion at dedicated to the topic at the SALT 2019 Conference in Las Vegas Thursday afternoon from giving it an honest effort.
“We see ESG as a methodology for underwriting risk,” CalPERS board member Dana Hollinger told moderator Jen Wieczner, senior reporter with Fortune, at the session’s outset. “There are off-balance sheet items to consider, so I use it as a lens.”
ESG is “additional information” that can be evaluated alongside traditional financial analysis, Linda-Eling Lee, global head of ESG Research with MSCI, added. There’s a lot of evidence that’s come out over the past 10 years that shows higher returns, better performance, lower volatility and lower tail risk when incorporating ESG.
“Companies that score well in our list of evaluations—including more diversity, treating their employees well, etc.—do in fact display lower volatility and beta,” agreed Lorraine Wilson director of investment products with JUST Capital, “which is in line with the findings of the academic community.”
Yet the all-important standard definition continues to frustrate the industry, mainly because of the differences in how it’s then applied.
“We spent the last two years speaking with 23 companies in 17 markets around the globe,” Matt Orsagh director of capital markets policy at the CFA Institute, said. “There was no common definition. It didn’t matter if it was someone in the Netherlands who is more sophisticated in the strategies because they’ve done it for longer, or someone newer in Brazil who is focused more on the G than the E.”
He also noted that about one-third of respondents associated it with negative or exclusionary factors.
Noting his firm is currently short Facebook, Gareth Shepherd, co-founder and partner with asset manager G Squared Capital said he’s found it to be a “gold mine,” but not at the superficial, top-line level.
“You really have to drill down to get an informational edge,” he told attendees. “Also, companies know how ESG analysts are rating them, so they can game the system, similar to what companies did with credit ratings. They can adhere to ESG and check a number of the right boxes, but there might be one that they don’t do well with, and that could be the iceberg that brings it all down.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
