From exclusionary screening to SDGs, the world of responsible investment is awash with jargon, buzzwords and acronyms.
One of the worst offenders, is the blanket use of ESG (environmental, social and governance). It has become a catch-all term that oversimplifies the complexities of ethical investment. People have become lazy about what ESG actually means and how it is used. When people talk about an ESG company or an ESG fund, what do they actually mean? Are we just ticking some random boxes?
When thinking about ESG factors as part of the whole responsible investment process, it is not just environmental, social and governance. You have got stewardship and integration. You have got screening, sustainable and impact investing, and other broad categories. But ESG has just become shorthand for all of this. This is where misconceptions and misunderstandings occur, because what you think as being appropriate for your requirements from a responsible investment perspective are distilled down to this one term. If you call something an ESG fund, it could be doing a whole variety of different things. The term is too basic.
Ultimately, it is clients – charities and their trustees – that will struggle. It gets more difficult for the end consumer to know what they should want. What are they supposed to be looking for?
There have been many iterations of responsible investment. If you are new to it, then ‘ESG’ is the kind of thing that captures the imagination. But often the end consumer still does not know what it means. We need to get so much smarter and precise about our language.
Engagement and awareness
In a recent Quilter Cheviot client survey, we found that respondents consider stakeholder voting and corporate engagement as low on the scale, when it comes to key priorities of responsible investing. This highlights a misconception of what the industry is and the goals it is trying to achieve. The engagement aspect of what we do is incredibly important, but that is not necessarily how it gets portrayed by the industry because it is long-term, complex and cannot be put in a nice little box or summed up in a neat little phrase. The financial services sector has become very lazy in explaining what it is we do and our purpose.
Quilter is looking at the terminology used and refining the language. We are going through the process, but it is hard to standardise the language across the entire organisation.
We will be focusing on engaging initially with clients over the next two years, and thereafter on an ongoing basis, to determine more clearly their responsible investment preferences, and what they want to achieve. This will not only help us to gain insight, but also increase awareness and understanding among clients of what is involved in meaningful responsible investing.
This is not just about taking into account ethical considerations or positive inclusions, which we have always done as part of our sustainable investment strategy, this is also a way of laying out our stewardship approach to our clients and demonstrating our integrating of ESG factors within the investment process.
Expectations and ratings
Another area oversimplified in responsible investment is expectations around fund ratings. If an investment manager uses one external data provider, often it will have inherent biases. It will look through your portfolio and chuck out a number or letter based on sustainability, which will almost certainly be better than the benchmark. But that rating is literally based on that provider’s data; it doesn’t take into account any other research.
To combat this, Quilter Cheviot uses multiple data providers and has its own research teams, which are charged with considering ESG factors within the investment process. This takes into account aspects such as voting, qualitative assessments and quantitative data dashboards. We do not want to just give clients a number; it is too simplistic because it does not take into account the many aspects of stewardship. A number may make you feel good that you are beating a benchmark, but it is not a true reflection of what is going on and is therefore bordering on the meaningless.
Article first published in Charity Finance, May 2022