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  • Tancredi Cordero

A financial feel-good-factor: the current state of ESG & Sustainability

This article was written by Ebru Smith, Founder & CEO of Ebru Smith Consultancy Limited, Associate Editor of Investment Week, and Tancredi Cordero, Founder & CEO at Kuros Associates.

For all the challenges the burgeoning Environmental, Social & Governance (ESG) and Sustainability sector faces, a whole host of multiple opportunities exist.

Investors need to be informed to avoid mis-selling sales pitch, which may also cause further damage to the financial sector. They must, therefore, be directed towards the differences and certainly be made aware of the present market challenges and opportunities.

Differentiating between Sustainability, Impact, and ESG

Socially responsible investing (SRI) is considered as the old school, exclusionary or negative screening method where managers invest in ethical companies, that do not harm the environment or undermine social values. This acronym is now generally replaced by the word Sustainability.

While Ethical refers to avoiding certain investments, Sustainable refers to finding investments but it is broad in its reach; covering companies which promote responsible corporate practices, stewards of environmental issues, diversity, climate change, consumer protection, human rights and all other ambitions that do ‘social good’.

Out of this wide scope was born the ever-popular label ESG Investing. ESG can be compared to factor investing in that the values assigned to each of the three factors; E, S and G, vary from manager to manager on how much one factor outweighs the other depending on their subjective beliefs. A manager may have a bias towards environmental stock, therefore they may have more of those stocks in the ‘E’ bucket. Another manager may favor the governance, or G factor more and have stocks which have better governance thus the ESG scores may differ from manager to manager.

On another front, Impact investors abandon the ‘old-fashioned’ exclusionary screens, instead look to invest in companies or projects which have a ‘positive end result’ such as social inclusion, meeting environmental & resource needs, providing better healthcare, education and improving quality of life. In its core, Impact investors believe that without their investment, the company or project would not achieve their targeted positive outcome.

Some proponents of ESG accuse Impact investing to be a form of ‘greenwashing’. Controversially, oil & gas and mining companies may be included in ESG funds even when their capital expenditure plans may not be consistent with their low carbon or net zero-emission targets.[1]

The choice is the investor’s but all three have a common ground in that they are an example of active management where managers invest according to criteria they set rather than following an index. That is not to say, that we do not have passive, i.e. index-tracking, ESG or Impact funds.

Active versus Passive Management

Active manager strength lies in the areas of research and analysis for stock picking. Managers are more likely to engage with companies on their sustainability efforts, especially in fixed income where there is no proxy voting.

Active managers who adopt ESG or Sustainability into their investment processes so that it is part of their DNA will likely gain an edge over those who are left behind like some who are only just beginning the integration process.

According to Morningstar data, ESG funds doubled in size to more than 668Bln Euros in 2019, up 56% from the year before. In 2019 alone, 120Bln Euros were invested into ESG funds of which 13Bln Euros went into passives. This demonstrates that even if the tracked indices contain companies with high fossil fuel emissions, flows into passives will continue to benefit passive managers. It remains to be seen how much corporate engagement exists in passive management.

Standardisation of reporting

As there is no reporting standardisation, investors are currently unable to compare like with like and guidance provided by asset managers can be vague. There are some guidelines available for managers such as London Stock Exchange’s guideline which was sent this to more than 2,700 companies listed on the LSE’s UK and Italian markets.[2]

The other guideline is by the Global Sustainable Investment Alliance (GSIA) which also reinforces the pace of ESG growth in European markets; “60% of assets managed for EU investors incorporate sustainable investment strategies”. The EU’s Non-Financial Reporting Directive (NFRD) of 2018 which integrated the Task Force on Climate-related Financial Disclosures, gives guidelines on how companies should disclose emissions and risks.

For data to be comparable, the metrics by managers have to be the same. Also, for investors to have a clear historical performance picture, data needs to accumulate over time in a uniform manner. This has yet to happen.

United Nation’s 17 Sustainable Development Goals, Net Zero Carbon Emissions of the Paris Agreement, Climate Action 100+, B Corp, Task Force on Climate Related Financial Disclosures and Global Reporting Initiative (GRI) are but some of the goals to which companies and large asset managers and organisations commit to. It is imminent that a global reporting standard will be agreed. It is currently not a legal requirement to report on ESG or Sustainability but this will likely change as the thriving market will cause regulators to emphasise transparency and uniformity of data for ease of comparability.

In a recent study titled “Another Link in the Chain”, ShareAction, a charity which aims to improve corporate behavior on ESG issues, found that large asset managers are not doing enough on shareholder engagement and proxy voting.[3]

The report found that the largest proxy advisor, ISS, is more supportive of environmental and governance resolutions than the largest asset managers. In a study by deVere Group, the largest independent financial advisory group, the majority of millennials surveyed gave socially responsible and impactful investing as their top priority over and above other performance and valuation metrics such as financial returns or past performance. [4]

It is no doubt that efforts like the Greta Thunberg’s, which aim to bring awareness to issues such as Climate Change, will continue to feed the minds of the young and likely bring about a more aware investment mindset in general.


ESG & Sustainability landscape continues its brisk transformation with new products coming into the market regularly to cater for different investor needs. ESG & Sustainability is yet to reach all market sectors. Investors are able to access the obvious clean energy, solar or renewables sectors but also those sectors not previously showcased such as female empowerment or diversity. In recent months, leveraged ESG ETFs and Vegan Climate ETFs have also launched. In the US, there is a move into ‘non-transparent active ETFs’. These regulator-approved wrappers combine passive with active strategies. Active ETFs are only 2% of the US-listed ETF assets so the capacity to grow is phenomenal. We have not seen the spread to many geographies yet either.


What this leads to a valuation bubble where product prices do not necessarily reflect the actual value in the underlying assets. We have seen this time and time again in financial markets, where an asset class becomes popular and due to increased demand prices become overstretched and then collapse. There seems to be some time before the fall in prices as markets are still catching up with heated demand. The current market climate dictates that investors have the time to mindfully invest by researching and locating investments that align with their own core values. One thing to bear in mind is what platforms offer what funds. Retail investors are generally with one platform which may only offer a limited choice of Sustainable or ESG funds or trackers. It is best for investors to research the funds relevant to them and then find where to invest in that product. Otherwise, they risk the chance of all investing in the same investment instruments as we saw in the case of Woodford funds.


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