Invesco: ESG: doing good or sounding good

Key takeaways

1. ESG goals can sometimes be at odds or conflict with each other

2. Investors must question what impact they are having on their investments

3. By interrogating and understanding data, investors can play a key active role

As the appetite for ESG investing grows, investors are becoming aware of some of the trade-offs that sometimes have to be made. Our panellists discuss why investors may need to take a more nuanced approach when investing sustainably.

While interest in ESG strategies has surged, investors have quickly become aware of the compromises or trade-offs they sometimes have to make when investing. Not every company, investors are finding, can tick all the ESG boxes.

Every decision can have a negative downside, particularly those made with the “best of intentions”, said Mike Barry, former director of sustainable business at Marks & Spencer.

As an example, he highlighted moves to replace ozone layer-depleting propellants CFCs in the 1970s, 1980s and 1990s. More recently, the clearing of rainforests to produce palm oil, a healthier alternative to trans fats, has presented a similar issue.

“All the time in history, we’re trying to get out of the frying pan and leap into a fire,” he explained.

Even with electric vehicles – one of the biggest success stories of recent years – which reduce direct consumption of fossil fuels, many of the metals used in batteries come from countries with questionable human rights and environmental records, said Barry.

Investors need to ask whether they are having a positive impact on the ESG process, according to Elizabeth Gillam, head of EU government relations and public policy at Invesco.

“What additionality are we bringing as an investor?” she asked. “Because investing in a wind farm [for example], particularly if we’re buying that exposure in the secondary markets, we’re simply just transferring money from one investor to another, and we’re not actually adding any additionality.

“We’re aligning our portfolios, but we’re not having an impact.”

Investors also need to question whether their ESG investment decisions have knock-on effects, particularly given the politicisation of some issues such as zero-carbon targets.

Gillam said: “How do we ensure that we’re supporting communities that potentially will lose out as a result of this transition?

“These impacts obviously won’t fall on the companies who are divesting assets. It won’t fall on investors. But it will fall on governments who will then be required to pick up and support those communities that are losing out in terms of this transition.”

She said investors need to consider some of the broader trade-offs when making an investment focusing on just one area, such as climate change, because “by doing good in one area you potentially are doing bad in another area of ESG”.

One of the big challenges facing investors when trying to understand the trade-offs that they have to make is the quality of data available, and this is where investors have to take a more active role.

It is up to investors to play a greater role in the allocation process and resolve some of these trade-offs, said Alex Edmans, professor of finance at London Business School.

“One thing for investors is their role of ‘boots on the ground’ investing and trying to ask these qualitative dimensions and measure these qualitative aspects, which are often swept under the carpet,” he said. “This move towards ever-increasing sustainability metrics need to be understood within a context. And this is the power of active investors.

“If investors get what they seem to be wishing for – which is a single, unambiguously clear, sustainability metric – then we will all be out of a job. Why? Because a computer can do that.”

This is where an active investor can add value, Edmans finished, by interrogating and understanding the data to uncover a key determinant of long-term performance that has not been priced in.

The above article was drawn from ‘ESG: doing good or sounding good?’ session at our ESG@Invesco digital client event on 17 June 2021. Please click here to watch the session.