Belinda Gan, an ESG investment director at Capital Group Crédit photos : Capital Group et Illustration montage : Maison Moderne

Belinda Gan, an ESG investment director at Capital Group Crédit photos : Capital Group et Illustration montage : Maison Moderne

Despite the sustainable investing revolution sweeping the industry, reaching agreement on the meaning of “ESG” remains elusive. Belinda Gan, an ESG investment director at Capital Group, explained the challenges in the latest monthly Paperjam/Delano “Investing for the long term” podcast.

Just as any two individuals might have different appetites to investment risk and return, so our personal values influence which environmental, social and governance (ESG) goals we want to be reflected in our portfolios. Yet, it is hard to assess the level of sustainability embedded in different organisations’ actions. For example, there is a proliferation of ESG investing labels generated by public, private and public/private bodies, each with their own methodologies and biases.

For many investors “E” means climate action and the energy transition. Yet water management, waste management, pollution, use of resources and efficiency are also vitally important challenges faced by communities and the biosphere. Furthermore, assessing whether an organisation is doing good, or harm, requires a nuanced approach.

“Companies are often branded as either heroes or villains, but it's not actually that black and white,” Ms Gan commented. “Take semiconductors for instance, which are key components of electric vehicles, solar panel arrays and wind turbines. The production of semiconductors is very water intensive, and a number of the hubs where chips are produced were increasingly exposed to severe drought in the recent past.” It is the companies that can manage both sides of this equation that will have the “greenest” profile. Yet, not only is measuring all of this a complex challenge, but it is also weighting the different factors to give useful metrics that can aid investment decisions.

Similarly, Ms Gan noted that suppliers of fossil fuels are often targeted for divestment. “The debate has become more nuanced with rising energy prices, inflation reaching new highs and the challenging economic environment,” she said. “We also need to ensure a just and smooth transition, considering the rights of workers and the communities that are currently dependent on emission-intensive industries.”

This is an example of the social responsibility thinking that informs the “S” of ESG (“S” being for “social”) and this too is a nuanced, hard to calibrate consideration. “We hear a lot about diversity, equity, and inclusion within companies, and I think we'd all agree that it's very important. Yet, getting the data related to those topics is more difficult than you might think,” commented Ms Gan. Moreover: not only is data lacking, but it is also often highly subjective.

“Building a diverse and inclusive culture leads to better ideas, better business solutions, and better opportunities to attract and retain talent” Ms Gan said. This demonstrates how social concerns also have governance implications for business. Fundamentally, “G” for “governance” tends to refer to matters such as the effectiveness and independence of the boards of directors, corporate culture, risk management, and so on. There is also thinking that a well-run company should automatically have greater respect for sustainability in all its forms. Yet again, though, measurement is challenging.

“The good news is that there are plenty of experienced investment professionals and other experts who are researching and evaluating ESG issues every day. Individuals can access that expertise through the different investment options that are out there,” Ms Gan said.

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