The (mis)alignment of ESG perspectives in the investment chain

As evidenced by the rapid increase of United Nations Principles for Responsible Investment (UNPRI) signatories, the integration of environmental, social and governance indicators (ESG) in investment decisions has become a popular topic. However, despite its popularity, there is no consensus among practitioners on what this actually means and how it should be tackled. The obvious lack of standardization is reflected by divergent ESG rating procedures, incomparable company sustainability reports and the widely differing strategies by asset managers and asset owners. This is a substantial hurdle as it can cause misalignment of perspectives within the investment chain, which keeps ESG from being pushed up the agenda. There appear to be substantial struggles on the road to ESG integration and several questions arise; are the perspectives on ESG integration aligned between companies, asset managers and asset owners? Where do possible obstacles on the road to responsible investment reside, what are they and how can they be overcome? My main findings are four-fold. First, I find ESG reporting fatigue among companies due to the sheer number of ESG ratings and rankings. Companies should not let this overwhelm them and be clear that they only respond to a handful. Investors should only use it as a starting point and ensure that it does not become a substitute for a real conversation with their portfolio companies about ESG. This interest is necessary for top management to sign off on sustainability initiatives. Second, I find that asset owners are not as convinced of the business case of ESG as asset managers and companies are. This is often reflected in the way they select, monitor and review their asset managers. Third, the lack of in-depth ESG due diligence by asset owners likely lets asset managers get away with decoupling statements from actions. More specifically, it appears that ESG and finance are often still separated. Lastly, companies are more reactive than proactive when it comes to ESG efforts. The main driver for them to embark on their ESG journey is the consumer. We can therefore play a significant role in creating a more sustainable world, either as the beneficiary or the consumer.