1. ESG and impact investing is a process, not an act.
- “Build a canoe, not an ocean liner” when taking the first step in ESG investing and then “take the next wise action.” Find the thoughtful entry points that allow you to get started and then reflect and iterate. If the decision seems too large and too complex, you won’t move.
- Practitioners shared their own experiences of getting started in ESG. Some set aside a portion of their portfolio to “audition” impact strategies or managers, while others began by removing coal exposure from a single asset class, such as equities or fixed income.
- The right systems, processes, and organizational culture also need to be in place to effectively dig into ESG issues. Leadership can help set the tone for the organization that ESG is a valued process and can work best when fully integrated into the investment teams, rather than operating as a separate, walled-off unit.
2. We believe this is an investment question and it takes humans to get to the right answers.
- ESG and impact investing requires the same rigor, depth, and care applied to all investment ideas and processes.
- Like all investment questions, there can be more than one right answer. ESG has evolved from a focus on simple binaries (e.g., whether or not a company has certain policies in place) to a more fulsome evaluation of the “what” and the “how” – what a business does and how they do it. This helps us gauge how sustainable a company’s business model and growth will be over time, not just at a particular point in time.
- As in all fundamental research, engaging with companies directly and using human intuition can help extract the most useful and usable insights from ESG data. Taking company polices and disclosures at face value can lead to incorrect conclusions or overlooked risks. In our view, this is where human insight is irreplaceable.
3. Focus on material performance data, not scores.
- For ESG data to be additive to the investment process and returns, we believe data should be (1) material and measurable, (2) transparent, not black boxed, (3) focused, not dilutive, and (4) provide insights into companies’ performance, not just their polices or disclosures. Getting away from aggregated data sets can allow us to take it apart and test the data empirically and also with our own intuitions.
- Our survey found that more standardized and systematic reporting, such as the Sustainability Accounting Standards Board (“SASB”), is most needed when it comes to improving the quality of ESG data.
- The SASB framework can provide a helpful jumping off point for identifying and classifying financially material information by industry. But just as the risks companies face are evolving, it’s important to stay flexible and iterate on the frameworks used to evaluate those risks.