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Will We Ever Find a "Coherent Vision" for ESG?

Values-Aligned Investing
November 27, 2018

How do eight investor groups with ESG-related acronyms find a “coherent vision” for corporate disclosure of environmental, social, and governance issues? Create a ninth group with yet another ESG-related acronym!

That’s the call from the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), CDP (formerly the Carbon Disclosure Project), and five other investor bodies whose common mission is to harmonize corporate reporting standards around material ESG issues and make them more transparent for investors. The new Global Investor Organisations Committee (or GIOC, for short) will seek to promote symmetry in ESG frameworks put forward by these other groups—“proactively articulating” how they all “fit together.”

As noble and well intentioned as this new initiative may be, it strikes me as yet another attempt to reinvent a wheel already put in motion by these organizations. On issues that are fundamentally values based—like good governance, environmental stewardship, and respect for human dignity— common metrics may never capture the full range and dynamism of complex issues that don’t fit neatly on a balance sheet. Hence, I won’t be holding my breath that the GIOC will finally get it right this time.

Nor should that be the expectation. As I settle into my new role as Aperio Group’s ESG/SRI Strategist, I am coming to see how our firm approaches ESG issues in other ways that are meaningful, manageable, and impactful for our clients. Here are four guiding principles:

  1. We respect ESG values but are "values agnostic" ourselves. The marketplace of ideas and march of history will sort out which values take primacy and ultimately prevail.
  2. We recognize that many ESG issues are indeed "material." But to the extent they are, astute investors may already be pricing in associated risks and opportunities.
  3. We regard the so-called ESG factor as a Holy Grail. Crusaders may chase it but never find a catchall definition of market-linked traits that are as discernible to investors as size, growth, value, and quality of earnings (to name but a few).
  4. Finally, as for ESG and alpha, we put this pairing in the same bucket as we do all alpha-related questions. We believe alpha is basically a function of market timing, factor selections, and stock picking. Alpha comes and goes as companies and active strategies fall in and out of favor with prevailing market conditions. The true measure of ESG is impacting market behavior and the human condition over multiple market cycles.

In the end, a systems-based approach that values natural capital (air, water, and land) and sustainable development goals (like advancement of human health, education, and economic opportunity) may be a more meaningful measure of corporate contributions to society. Standards-setting bodies help but can’t advance these goals on their own. Individuals must consider social issues as they make their active purchasing, investing, and lifestyle choices. A coherent vision of ESG will necessarily evolve as market decisions purposefully incorporate such existential needs.

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