ESG is not impact investing

Google famously used to say, ‘don’t do evil.’ But supposing instead, it said: ‘go good.’ There is a not so subtle a difference — one is passive, the other positive.

Maybe that is the problem with ESG. People perceive it as a proactive approach to doing good, but maybe that would be a better description of Impact Investing. In reality, ESG is about managing risk and realising opportunity by considering environmental, social and governance.

Maybe that is why there is this clash between ESG folks and Tesla aficionados. Tesla has had a massively positive impact on the war against climate change, but for reasons explained here before, its ESG score is pretty poor.

Why is that? ESG doesn’t measure Impact, or at least if it does, it is just one measure. It certainly doesn’t emphasise Impact. So you can have a massively positive impact in one respect, but if, for example, your social policy isn’t up to much, then your ESG score will suffer.

Now EY’s global vice chair of sustainability, Steve Varley, has said that ESG has become confused with Impact investing.

Speaking to City AM, he said: “Over the last five or so years, financial marketeers used ‘ESG’ to express ‘impact’, I think that’s where it’s run into trouble.”

What’s the problem

The difference between ESG and Impact investing has been covered here before. Alix Lebec, the founder and CEO of Lebec Consulting, told me that “ESG falls into this category of ‘doing no harm.’”

She explained:

“In other words, a lot of investment firms purported to be socially conscious; in fact, the majority of them focus simply on screening out investments that would be harmful for the environment, perpetuate inequality, and misalign with good business governance and ethical behaviour.”

By contrast, she says: “Impact Investing relates to investment decisions that are “driven by proactive value creation, innovation, and intentionality—with the aim of supporting both people and the planet,” such that everybody gains.”

Hijacked

In his comments to City AM, Steve Varley said: “ESG has been hijacked by several stakeholders, and it’s been stretched from a basis for risk management into something to do with doing ‘well’.”

Communication

The problem may be a communication challenge.

Marketeers are not necessarily known for their subtlety — they don’t go in for ‘buts,’ as in ‘our brand is the best at going such and such but….”

Who can blame them?

But the difference between ESG and Impact Investing appears subtle, but when the two approaches are rolled out, the difference is like chalk and cheese.

Marketeers take the easy route and explain ESG in terms their audience expects, but this is misleading. The audience thinks they are getting cheese, but when they bite into ESG, they taste chalk.

They don’t like it, and the result is a backlash; and Elon Musk calls ESG the devil incarnate, and an army of Twitters tell us about the evils of ESG, and frankly, I would be non too pleased either if after a lovely meal I tucked into cheese only to find it was a kind of flaky, soft limestone that left horrible marks on my clothes and face.

Steve Varley said: “I think there is a danger that ESG funds can fall into disrepute because there are not enough standard definitions.”

Alix Lebec said: “The sooner companies and financial institutions invest in their organisations and stakeholders’ future (e.g., transition to clean energy, efficient water and waste management, and reduced carbon emissions)—and partner with the impact investment managers, non-profits, and social entrepreneurs who are invaluable to meet sustainability goals—the better positioned these businesses will be to last and succeed.”

Risk versus opportunity and Impact

There is, of course, a huge difference between managing risk and making an impact. In theory, a risk approach helps manage more proactive strategies — making an impact matters, but we must be cognizant of the risks.

ESG is what it is, but when you suggest it is something else, you hit a world of trouble.