ESG is dead
Long live sophisticated sustainability
Last week, we published our latest report, ‘Impact Investment Leaders and Laggards’, in which we reveal which are the top ten positive and negative contributing funds relative to each of the 17 UN Sustainable Development Goals (SDGs) — and why.
Featured in the FT, our research lays bare three key considerations for anyone building or buying funds in 2022. (Notwithstanding the somewhat misleading Tweet below, ‘scrap sustainable finance’ is not one of them.)
Read on to learn more, or download the full report here.
1. Bundled scores are the Schrödinger’s cat of sustainability
There’s no such thing as a ‘sustainable investment.’ Almost every company, industry, and fund impacts some goals positively, others negatively. The difference is explicit among ‘economic’, ‘social’, and ‘environmental’ pillars. Resource extraction, for instance, undermines the latter two but drives vital economic growth in developing countries.
Even on one metric, an investment can be ‘good’ and ‘bad’. Social media supports and undercuts gender equality in different measures. Despite well-documented abuses, it improves women’s healthcare and education: distinct targets with correlated outcomes.
Why it matters: Time to unbundle E, S, G; planet, people, prosperity; et al. Each represents a suite of different, even conflicting, objectives. An acronym or catchall concept obscures valuable information and misdirects flows. Without looking at the data inside Schrödinger’s box, it’s impossible to know and optimise your investment impact.
2. There are critical tradeoffs in a very un-green green transition
The transition to a low-carbon economy is a case study in sustainability tradeoffs. Among positive-contributing funds, the biggest commonality is exposure to renewable energy. Conversely, metals & mining, upon which renewable development depends entirely, is among the most consistently held industries of negative-contributing funds.
The inconvenient truth? Solving climate change is, at once, the lynchpin of global sustainable development and its major conundrum. Building renewables at necessary scale is a mine-digging, energy-burning, acid-leaching, waste-dumping business, the effects of which are — like climate change — distributed unevenly. But it is necessary.
Why it matters: Investors need sophisticated impact and ESG data to navigate tradeoffs. What are the positive and negative externalities of the industry? Its value chain? In the face of which, how responsibly does a company manage its operations? Its supply chain?
3. Financial inequality impedes sustainable development
Poorer countries are in urgent need of sustainable investment. They bear less responsibility for climate change and are yet more exposed and less resilient to its effects. Equally, investing in developing markets has a far higher relative positive impact.
Counterintuitively, a recent study revealed ESG diverts capital flows away from those countries in most dire need of investment. In effect a risk-mitigation tool, ESG is biased towards large companies with reporting resource and against those in developing markets, due to perceived social and governance flaws and straightforward data gaps.
Why it matters: The UN identifies poverty eradication as “the greatest global challenge and an indispensable requirement for sustainable development.” Every SDG depends on international prosperity. Investors and governments need better data coverage to activate flows towards, and spur economic growth within, countries that need it most.