The road towards responsible and sustainable objectives is not a smooth and straight line, and there is more than one way to go. It is a complex journey, with bumps and potholes. It is also a journey offering different choices. Everyone has their own priorities: Some sort of pieces of identity of who we are and who we want to be. Some sort of endless list of personal considerations.
I am a fervent defender of sustainable considerations and actions. While I am doing my best to be animated by stubborn mindset of optimism, I also face regular wake-up calls from the embedded complexity, my own personal limitations and cognitive biases. And let us face it, there is no shortage of valid criticisms.
When the criticism rises to the top of my head, coming from either an internal little voice or from around me, I just remember my identity, my stubborn optimism mantra. The proverbial quote “there is no effort without error and shortcoming” from Theodore Roosevelt reverberates mechanically.
“There is no effort without error and shortcoming” (Theodore Roosevelt)
“In any risk worth taking, there will be pain and there will be loss”. This is valid in life as well as in investment. If economics is a human science and if investment involves significant behavioral considerations, it should not be surprising that sustainable investment is not a panacea.
As said by David Attenborough, “We are at a unique stage in our history. Never before have we had such an awareness of what we are doing to the planet and never before have we had the power to do something about that”. We also have the extraordinary power to solve the greatest of challenges. The way we invest our money is part of the toolbox.
But sustainable investment is not some sort of all-weather engine to navigate the exuberances and drawdowns of financial markets. Investing around self-transcendent values simply means that beyond expected financial returns, investor ambition is to be proud of the way their money is invested. This does not presuppose a better or worse return, neither a smoother nor more turbulent journey.
Mindfulness is a quality that every human being already possesses. It is not something you have to conjure up, you just have to learn how to access it.
Every investor should understand that uncertainty is reality. Everything else is mostly just a made-up story. Once this is understood, investors have made their first step in the direction of mindful investment. From there, and if success in investment requires an understanding of where risk is taken, measurement of environmental, social and governance (ESG) as factors is another step in the direction of the mindfulness1 experiment. We should not forget that mindfulness is a quality that every human being already possesses, it is not something you have to conjure up, you just have to learn how to access it.
Did you know for instance that even the prestigious CFA Institute2 released a guide for financial services professionals around ethical mindfulness? This clearly indicates that investors are better equipped with metacognition (the awareness of awareness itself) and top-down control (choosing how and what to think). Both speak for themselves to avoid bias, preference, and prejudice. A nice fit to respond the fundamental disruptions that we are facing surrounding the state of environmental degradation.
While it is evident that including ESG considerations in investment decisions improve the risk-adjusted return, it is not to say that this should be considered in some sort of daily increments. Some days, some weeks or even some years could be detrimental.
The traditional setback around ESG integration is the data quality. As said by Peter Drucker, “if you can’t measure it, you can’t manage it”. In the sustainable investment world, ESG ratings, are by nature not precise, neither homogeneous. The interpretation of ratings is very important for investors who want to integrate ESG factors into their investment process. Rating providers have all different biases and methodologies. A company can have a good ESG rating from one provider and a poor ESG rating from another. The bottom line is that, as of today, both the lack of reporting standards from corporates and the lack of universal a method from data providers create ambiguity in the result. Scoring a company around ESG metrics is inherently subjective.
To avoid misleading information, the only way is to get an understanding of the embedded methodologies and to understand the strengths and weakness. For investment managers it means using ESG data as a research tool, for clients it means going beyond the ESG rating of the investment product to get a sense of the company’s sustainable commitment and actionable roadmap.
Through my optimistic lens, ESG ratings are not perfect but they are still valuable. No one should understand ESG integration as a plug & play solution. Research remains at the forefront of managing money, this is true from a financial and traditional way to look at investment cases as well as gauging the sustainability of cases. There is no miracle solution to avoid making wrong investment choices and avoid the risk of greenwashing. Efforts, homework, and skepticism on one side, humility, awareness, and transparency on the other stay prerequisites.
There is no miracle solution to avoid making wrong investment choices and avoid the risk of greenwashing.
ESG integration is to be considered as a necessary but not sufficient condition. Investing into the opportunities offered by megatrends like clean energy, clean water, energy efficiency remains at the forefront as those have to be the next great global industries.
Walking the talk is demanding but relevant on both dimensions. At the beginning, this is a demanding effort, but it rapidly morphs into some sort of routine. A journey towards clarity and focus, being fully aware of the limitations and complexities.
1 Mindfulness is the basic human ability to be fully present, aware of where we are and what we’re doing, and not overly reactive or overwhelmed by what’s going on around us.
2 CFA Institute is a global, not-for-profit professional organization that provides investment professionals with finance education. It aims to promote the standards in ethics, education, and professional excellence in the global investment industry