ESG needs to have a solid impact

According to a survey for the SEC Newgate ESG Monitor, climate change is a bigger concern for UK consumers than both the Covid-19 pandemic and the economy.

Proof that ESG has truly made it comes in the form of imitators and hangers-on: in the wake of ESG, comes greenwashing. But like counterfeit T-shirts sold outside concerts or the faux-designer bags that are often hawked in vacation destinations, there is a difference between fakes and the real thing.

Most people understand greenwashing to mean the practice of using spin to seem more sustainable or ESG-compliant than you actually are, often through vague claims and buzzwords. But the system itself may be creating this problem with processes and ‘criteria’ that are used to assess who is green and good and who falls short. If you get this wrong, then you risk losing sight of the forest for the trees.

Let me be very clear – I think all businesses should be held up to the highest scrutiny when it comes to their ESG impact. My issue is when the organisations who create the questionnaires and metrics by which this is measured do not fully understand that ESG impact, particularly when it comes to the ‘S’ – which is much more difficult to implement – should be measured by on-the-ground results, not by ticking boxes and navigating a form.

The ability to work around red tape is not an indicator of impact but a new industry of consultants is growing alongside the traditional advisers that are scrambling to adapt.

This is a problem for a number of reasons. For a start, if consultancies use different methodologies, that leaves the end user – whether they are a pension plan, family office or a concerned investor – comparing apples with oranges. A recent paper by MIT Sloan showed that more than half of the discrepancies in results from different agencies come because raters measure the same attribute with different indicators, while just under half are because some include different attributes.

Even assuming that these indictors and attributes are right, this isn’t good enough. Investors deserve clear information to align their choices with their ethics.

More importantly, if ESG is not properly measured it means that strategies that are good for box- ticking but ineffective on the ground will take precedence over the ones that can have a real impact.

Our significant experience with charities allowed us to understand true impact and we used this when planning the Women in Safe Homes fund, the gender-lens fund that we jointly manage with Resonance. We work harder to focus on results that matter, rather than metrics that require less work but do not genuinely indicate impact.

To stop greenwashing, we need to avoid red tape and focus instead on making sure that we ask the right questions, because getting the right answers is what really matters.

Keith Breslauer is managing director of Patron Capital