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Moving beyond ESG- Replacing ESG

Sustainable investment has become a significant trend in financial markets as science and society address a growing range of issues that pose risk and opportunity: biodiversity protection, water management, extreme weather events, diversity, equity and inclusion, are just some of the issues on investors’ minds.

Date published
18 May 2023

The complexity and urgency of these have prompted a rethink on how sustainability is fundamental to exercising our fiduciary duty to manage other peoples’ money with prudence, loyalty and care. This means that fiduciaries do not have an option to ignore what matters to generating repeatable, risk adjusted returns on behalf of clients and beneficiaries. If it’s pecuniary1, it’s fiduciary.

This focus on finance within sustainability brings clarity to this agenda. The quip that it is time to say, ‘RIP to ESG’, sums up the need for fresh thinking2. We are returning to the underlying economics of value creation. Environmental, Social and Governance (ESG) has always been weakened by the absence of the letter F to stand for Finance. Hence, we have shaped our sustainable investment strategy on the understanding that value creation and effective risk management require us to steward financial, human and natural capital. This holistic approach means we can bring insight, data, analytical tools and stewardship to develop a new paradigm for investment. That puts a premium on fundamental analysis with a focus on impact, not just intentions.

Critics of ESG have argued that the acronym is not fit for purpose. Anne Simpson, Global Head of Sustainability, Franklin Templeton, is inclined to agree but not in the way they may expect. In addition to the absence of finance and its companion, fiduciary duty in this shorthand term there is also ‘aggregate confusion’3 on what the term includes.

Put simply, there has been a lack of specificity about what ESG is, how it is used and what it has come to represent. This has enabled unwarranted criticism of essential and investment relevant actions in the industry because they can too easily be misrepresented.

Ultimately, we should replace ‘ESG’ in favour of communicating with our clients with greater specificity and transparency.

ESG has become a dreaded acronym in the industry – two adjectives and a noun now thrown together and used as a noun. Martin Currie has always had a clear focus on stewardship and investor-led integration.

The new paradigm brings forward the missing piece: impact. Reframing ‘ESG’ through the key elements of: Stewardship – the actions of the investment manager to act as effective and responsible stewards of capital on behalf of clients; Sustainability – the analysis of sustainability related risks and opportunities as well as investee company behaviour, and now, Impact – the focus on real world outcomes driven by impactful investor engagement and an intentional commitment of capital to those companies providing solutions shows how innovation can open up new possibilities.

By being clear as to the intention, scope and actions associated with each, we can better serve our clients who rely upon us as their fiduciaries for generating repeatable, risk adjusted returns. This in turn allows us to position ourselves more effectively for driving positive societal change at times of competing demands and complex challenges ahead.

Ultimately, we should replace ‘ESG’ in favour of communicating with our clients with greater specificity and transparency.

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1Source: A ‘pecuniary factor’ is defined as a factor that a fiduciary prudently determines will have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with a plan’s investment objectives and funding policies.

2Source: Reference from the Official Monetary and Financial Institutions Forum (OMFIF) Dinner at the House of Lords (February 24, 2023), and written up in a ‘Big Read’ by Moral Money and Gillian Tett of the Financial Times.

3Source: Aggregate Confusion: The Divergence of ESG Ratings, Florian Berg, Julian F Kölbel, Roberto Rigobon (August 15, 2019), Massachusetts Institute of Technology (MIT).

Regulatory information and risk warnings

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.

The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.

The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.

Past performance is not a guide to future returns.

The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.

Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.

The information provided should not be considered a recommendation to purchase or sell any particular strategy/fund/security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.

The analysis of Environmental, Social and Governance (ESG) factors forms an important part of the investment process and helps inform investment decisions. The strategy/ies do not necessarily target particular sustainability outcomes.