IMPACT INVESTING 2022/Q2 - Page 6

A New Era of ESG?

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Source: Jefferies, BakerAvenue

There has been an increasing amount of attention surrounding ESG, especially following the Economist's most recent edition, which states that 'three letters won't save the planet.' While backlash has ensued, it has also left some investors wondering, what exactly is ESG?

Here are key considerations investors should understand when thinking about ESG.

 

It is important to first recognize that there is a distinction between ESG integration, net zero investing, and impact investing. Each of these is a different concept, and therefore require different approaches and measurements.

ESG Integration

Investors should not be overly reliant on third-party ESG ratings as part of their due diligence process. Instead, investors should understand material ESG issues for each security and conduct thorough analyses for each.

Net Zero Investing

The first issue investors should consider is their priority: is it to decarbonize their portfolio or decarbonize the real economy? Decarbonizing a portfolio consists of tracking carbon exposure metrics and divesting from high-emitting companies. Decarbonizing the real economy means aligning portfolios with national decarbonization scenarios and engaging with high-emitting companies.

Impact Investing

Investors should clearly understand how their investments have stand-alone and measurable impact. For public markets investors, this will generally be through engagement, or even activism.

As ESG policies regularly undergo change, investors should have dedicated resources in place to navigate and understand the evolving landscape. Driven by the recent SEC proposals, regulation of capital markets continues to develop, central banks of the Network for Greening the Financial System (NGFS) utilize climate scenarios, and Fiscal Policy continues to shape asset prices. US midterms will impose new impacts.

Sooner or later, “ESG” will no longer be a stand-alone concept. ESG issues are becoming more regulated and standardized, meaning that “ESG Funds” and “ESG stocks” will no longer carry as much significance. As this shift happens, we will see more of the ESG community becoming specialists in either the E, the S, or the G.