As the interest on ESG investing grows among the asset management industry, it becomes increasingly important - and difficult - to define what the acronym really means.
ESG investing seems to be a term often misused and even mis-sold, says Sébastien Thévoux-Chabuel, portfolio manager and ESG analyst at the French investment house Comgest.
Thévoux-Chabuel comments: "Always eager to sell something, some in the asset management industry may have marketing teams that supply all kind of funds - at the risk of greenwashing (and even of mis-selling).
At the very least, any equity fund claiming to invest responsibly should be very clear about its goals, means, processes and outcomes.”
"We could wonder if fiduciary duty has not been lost in some way along this process. Full transparency should be the number one criteria of responsible investment.
Trying to be everything to everyone is a good recipe that leads to irresponsibility. At the very least, any equity fund claiming to invest responsibly should be very clear about its goals, means, processes and outcomes."
Despite considering that fund managers and asset management groups should take greater care when promising socially responsible products to investors, the ESG analyst recognises how challenging can be often to ensure an equity fund meets such criteria.
He adds: "This has been, and remains, a very complex issue. The demand for responsible investment has grown exponentially but it still varies widely across countries and clients. Each country or client can have various cultural sensitivities, legal backdrops and different ways of prioritising the numerous issues related to corporate social responsibility (CSR) and sustainability.
"In addition, the elephant in the room remains how to reconcile truly financial and ESG performance. While bridging this is possible, it may not be that obvious."
Thévoux-Chabuel also says that the number of large asset owners allocating some of their investments to "low carbon" and/or "impact investments" has considerably grown over the last few years.
He continues: "Although there has been a lag, we are also seeing the same trend for retail investors.
"Based on our experience, there are three routes to succeed with this: the first option is to go with a passive/factor-based approach at a very cheap cost, using available data from companies (at the risk of greenwashing or embedding design flaws in the funds); the second is to look for thematic funds with a risk of needing to invest in a very restricted manner that compromises performance; and the third is to evaluate the low carbon or impact credentials of existing funds, seeking a solid track-record of risk-adjusted performance as well as ESG that naturally derives from the investment process."
When asked whether it may be easier to launch new equity strategies incorporating ESG factors embedded in the investment process rather than changing the investment process of existing bond funds, he said that it depends on the types and styles of the funds.
"If ESG did not make any sense for certain funds in the past (such as value funds, money market funds or most hedge funds), we are not sure it would make any more sense now. It may well be like trying to put lipstick on a pig.
"For a thematic fund with a clear focus on addressing an ESG issue - it makes a lot more sense to start from a blank page. I think that most people would agree that quality growth investing without embedded ESG factors seems a bit foolish."