currently being defined in “ two different ways at the same time ”, leading to suboptimal outcomes .
Input and output investing
One way is input investing , which is used in standard indices and takes ESG factors along with risk and return indicators of companies into account before putting them through a valuation process . The other is output investing , which tries to pick companies based on their superior ESG scores .
“ Quite often ETF issuers will flip between the two ,” Kirk said . “ On the one hand , they have benchmarks that are ESG input benchmarks , and on the other hand , they talk about trying to pick good companies .
“ In an ESG input world , valuation matters . You could have an awful company but if it is cheap enough and that poor ESG score is in the price , you will buy it .
“ It can lead to the ridiculous situation where your ESG portfolio is full of what a client deems poor companies . But in this world , you are legitimately buying them because you think they are going to outperform .”