Sustainable investing lately has become politicized. Numerous GOP-controlled state governments have sought to ban ESG-oriented investing from public portfolios they control. Democratic state officeholders have pushed in the opposite direction.
The crux of the campaign against using environmental, social and governance investing precepts is that these supposedly will lead to poor results—when only financial assessments should be employed to pick investments. But to Northern Trust Asset Management’s Julie Moret, the objection is puzzling. “I don’t understand why they have called out [ESG investments] as non-financial,” she says in an interview.
ESG is “an additional screen” to be used in the prudent due diligence that an investment requires, says Moret, global head of sustainable investing and stewardship at NTAM.
Her argument is that ESG is a necessary component of risk management. The garment industry, for instance, uses a lot of water to dye clothes. The water’s disposal is an important element in how a clothing maker impacts its local community, she points out. An environmental problem could harm the company—something that may not be apparent in traditional financial statements.
Investors “need to understand” how corporate actions “can lead to impairment and destruction” of a business they plug money into, she reasons.
“By not trying to understand” how ESG considerations factor in, investors “are not doing their fiduciary duty,” she declares.
On the other hand, to some, “ESG has become a panacea” in a quest “to find the perfect company,” Moret observes. No such company exists, she adds, and adopting ESG evaluation to find it “is simplistic.”
One problem, she finds, is that sustainability measures often are inadequate and “do not capture the whole pie.” An obstacle is that large companies are better at disclosing ESG risks than smaller ones, who lack the resources. In addition, “The plethora of frameworks” to gauge ESG “can be confusing,” she notes. Two standout pathways to disclosure, she says, are provided by the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board.
Unfortunately, Moret says, “information gaps” can lead to “mispriced risk and inefficient capital allocation.”
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Tags: Disclosure, ESG Investing, impairment, Julie Moret, Northern Trust Asset Management, Risk Management