Why ESG semantics need to be clearer


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There are approximately 6,500 languages ​​spoken every day in the world. Of these, English has the most words. It won’t surprise you if you’ve ever read about the investment industry, where it sometimes seems like there are 10 names for a topic.

Ethical investing is undoubtedly one of these topics. “Ethics”, “green”, “responsible” and “impact” are just a few of the seemingly endless terms used to describe more or less the same thing.

Ethical investing has become a hot topic in recent years, with more and more people wanting to know exactly where their investments are going. This is not, however, a new trend. For decades, some fund managers have ethically scrutinized what they see as responsible investing.

But what has increased lately is the regularity with which we talk about it.

The term “environmental, social and governance” (ESG) has quickly caught on in our everyday vocabulary, but does the end investor really understand what it means?

The FCA manual explains ESG financial considerations only as: “environmental, social and governance factors (including climate change) that are important for the sustainability of an investment”. But, again, “sustainability” means different things to different people.

Training advisor

VS Associates director Victor Sacks believes the first step in making it more understandable to clients is to educate the advisers themselves.

“It starts with us. There is a lot of terminology, but we don’t need to blind the customer with it, ”he says.

Sacks begins his own training by preparing for an exam to gain ESGmark accreditation. He also plans to turn his research around by asking his clients what they don’t want to be involved with, rather than their ethical preferences.

He says: “Not all customers are aware of the availability [of ESG investing]. It is up to us to promote it and make it known. I have informed my clients of my plans and they all agree with me. But I need to know more, hence the review.

“Others are going to poop, saying their customers don’t ask about it. But I wonder what would happen if they opened up the conversation.

Sacks continues: “We are [now] more aware of our surroundings and what we would like to do to improve our own situation, from where we live to how we work, and in my humble opinion, that goes into the ESG space.

Elsewhere, Shore Financial Planning chief investment officer Ben Yearsley says ESG is “a fad,” but only because everyone is talking about it so much. He is hoping that in five years or maybe sooner he will be grounded in a process and counselors won’t have to explicitly ask clients about it.

ESG has already established itself in many groups. Yearsley cites Fidelity and JP Morgan as two examples where this is now part of the processes used by analysts. But he agrees that the terminology is “ridiculously confusing”.

He says: “[The terms] all of them mean different things to different people, and probably all with different expectations about the ESG nature of their funds. “

The co-founder of mortgage lender Atelier Capital Partners, Chris Gardner, says: “The question of the scope of the term ESG is interesting because it covers so much.

“And next to that is the aspect of how it applies to businesses and individual sectors, to the point that it’s even a useful term to understand?” “

He adds: “We have sought to develop an ESG policy in areas where it could make a difference. What we do as a business needs to be translated into what investors need to understand and the end users of the investments.

Gardner wonders if the term ESG really makes sense, claiming that the E and the S are what people can understand the most.

“I think we are starting to see the emergence of a common language,” he adds.

Net zero

Companies are increasingly thinking about the social and sustainability aspects of their business, especially with a move towards net zero emissions, which Gardner says is the start of an alignment between organizations.

Although the use of the language differs by industry, the aspirations of companies are similar. Gardner says that many companies take into account the same goals, such as those of the Paris Agreement, the international treaty on climate change. Later this year, the UK will host the United Nations Conference of the Parties on Climate Change (COP26) in Glasgow, potentially further aligning beliefs.

Although the UK is no longer a member of the European Union (EU), a fairly common practice among businesses is the adoption of the European Commission (EC) Action Plan on Sustainable Finance. Gardner calls it “the bible by which so many people operate.”

The EC says that in order to help the EU’s climate and energy goals for 2030, a “common language” and a “clear definition” of what is sustainable is needed.

The EC action plan on financing sustainable growth called for the “creation of a common classification system for sustainable economic activities”, or an EU taxonomy.

Gardner believes taxonomy will become the common language for businesses and investors.

“This means that we can understand the credentials of a company that is achieving certain goals, or their aspirations, which can make a big difference,” he says.

“Responsible investment”

Beyond semantics, the need for generic terminology is vital, especially if the industry wants investors to be more involved in ESG processes.

One idea is to rename the sector to “responsible investment” instead of “ethical investment”.

“Ethics” means different things to different people and is difficult to pin down, while “responsible” can cover all topics while remaining agnostic on certain elements.

Atelier’s Gardner explains that as a business, it lends responsibly.

“It’s a broad term, but we only lend to borrowers who will realistically repay; we do not lend to borrowers whose assets are in undesirable lines of business, such as casinos or excess carbon production. “

Gardner continues, “It’s not just about being ethical, it’s about being responsible. It’s about making sure that you are responsible for what you do.

“It just isn’t enough to say, ‘Sorry, we only sold the product. What the customer does with it is their responsibility.

“Companies need to be responsible for the entire life cycle of what they sell. “

Taking this approach could also offer a business advantage to advisors.

Before any future laws or regulations come into effect, using ESG practices and plain language can help them stay ahead of the competition.

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