As the uptake of ESG in the community of investors accelerates, more thought is being given to what ESG is (and is not). We have discussed previously how the market distinguishes between exclusionary (what not to own) and inclusionary (what to own) approaches, and the criteria that drive those distinctions. Our view of a comprehensive and integrated approach to ESG is one that establishes certain table stakes, the must-haves, certain absolute or at last near-absolute exclusions, the must-not’s, and an overarching expectation that the strategy must be geared to global systems change, the idea that ESG must be embraced at a deeply fundamentally level across the broadest swath of global business and global communities possible so that even small incremental changes have massive potential for systemic improvement.
Must-have’s
The characteristic we find common to the ESG investment managers to whom we commit client capital is a baseline policy around environmental, social and governance considerations that comprehensively informs their investment processes and portfolios. We do not include strategies that only contemplate a single facet or theme of ESG, such as only looking at workplace diversity or only looking at carbon footprint. The guidelines and principles of ESG are deeply intertwined, and you do not necessarily have a high-performing company or community because they address a single issue. While there are no perfect investments, we seek investments that more fully reflect an integrated approach to ESG that recognizes that economic, social and environmental justice come hand-in-hand.
Must-not’s
Some things are simply too egregious to own. While as a practical matter no screen is ever absolute, there are principles of exclusion which can apply when there is no visible path to a more just, equitable and inclusive world in a particular investment. Investing in companies or governments that do business with or support genocidal regimes is anathema. If there is irrefutable evidence of human trafficking and modern slavery, similarly that would lead to avoidance. The international Convention on Cluster Munitions addresses the humanitarian consequences and unacceptable harm caused to civilians by cluster munitions and provides a lens for excluding companies and governments that still produce or utilize this type of weaponry. Chemical weapons receive similar recognition and treatment. These are areas that are shocking to the extreme and tough to view as investable through the ESG lens, but they also represent a very small portion of the universe and do not represent a material sacrifice in terms of investment opportunity to leave out.
Global systems change
When the score sheets are tallied, the real question is how the world is better for having committed to an ESG investment approach. The path to improvement requires investing in small and targeted high-impact ways to drive rapid change and innovation, and in large and more general ways where broad but incremental changes made on a large scale can also be game changers. We look at it from a systems change perspective – how are changes implemented that fundamentally improve the operating parameters of global systems like water, climate, nutrition, health care, education, and economies. We also understand that these giant systems are also interrelated and interdependent. To understand these systems and break down the challenges to understandable and achievable goals, we embrace the United Nations Sustainable Development Goals, which offer us 17 big picture goals agreed upon by the UN’s members to be achieved by 2030, and 169 underlying targets for measuring progress toward the goals. A good ESG investment to us is one that advances one or more of those goals and does nothing to draw the global community backward on any or all of the goals.