Opinion: Why investors want to see an ‘I’ in ESG

ESG is due for a rebrand. Instead of the tired controversy over its relevance, the debate has now moved on to how to measure the impact of investment decisions on people’s real lives. Increasingly what investors – professional and private – want to see is ‘I’, real impact, independently verified.

Additionally, to assuage the critics, a raft of regulation and legislation, from the UK’s Sustainable Disclosure Requirements (SDR) to the EU’s Sustainable Finance Disclosure Regulation (SFDR), is simultaneously increasing scrutiny on ESG whist trying to bolster trust. There’s nothing like solving a crisis of confidence in one acronym by suggesting a few more!

Siloed approach

By its very construct, ESG represents a siloed approach to tackling environmental and social issues. And whilst we see increasing evidence of how ‘Environment’ is being supported through investment choices with the use of recognised standards and benchmarks, supported by a shared comprehension of types of carbon emissions (Scopes 1, 2 and 3, as defined by the Greenhouse Gas Protocol), the story for ‘Social’, the human side of the equation, has proven more complex.

The challenge for all organisations, particularly fund managers, against a backdrop of consumer and investor scepticism, is how to demonstrate real impact on what many people connect and relate to most – their communities and those who live in them. The next step is to replace purpose-driven, conceptual narratives with independently verifiable, real-life data, monitored and reported over time, against ambitious yet realistic indicators. 

Much of the reporting on the ‘S’ in ESG still relies on companies publishing policies, using negative screenings (often related to controversies) and showcasing one-off initiatives. The ubiquitous phrase ‘we have changed lives’ is often found across corporate websites but can lack substantiation or metrics that can be compared to industry peers or demonstrate measurable progress against standards. It’s time to shift from focusing on controversies to understanding how we can deliver positive change.

The ubiquitous phrase ‘we have changed lives’ is often found across corporate websites but can lack substantiation or metrics that can be compared to industry peers or demonstrate measurable progress against standards.

Family offices showing the way

We see family offices and endowments making a serious contribution to the impact investing agenda. The Global Family Office Report 2023 by UBS found that family offices allocate approximately 19% of their total investment portfolio to sustainable or impact investments and this is on the rise. Whilst according to the Global Impact Investing Institute (GIIN), 85% of family offices report high satisfaction with the social and environmental outcomes of their impact investments. Can the institutional investment and corporate community now emulate their example, and come out from under the ‘social washing’ mantel?  

Firstly, what is missing in many aspects of ‘S’ is consistent, comparable monitored data with clear performance indicators and measures of progress. Secondly, it is often subordinated to Environmental and Governance issues – the poor relation which is monitored for reputational issues rather than actively measured for positive, material contribution. Thirdly, it is often not anchored in geographical context: the specific needs of the communities in which businesses are rooted and which provide their licence to operate - from job creation, to training opportunities to infrastructure investment. Lastly, those most affected by investment, be that the customer, consumer, or community, are often voiceless. Apart from purchasing power, we have little understanding of how, as a recipient, they have benefited – or not – from the investment made. 

Those most affected by investment, be that the customer, consumer, or community, are often voiceless. Apart from purchasing power, we have little understanding of how... they have benefited – or not – from the investment made.

Yet, we know that what motivates people to care is seeing their own communities flourish, both on a global and local scale, and that investment in areas such as job readiness, social mobility, transport infrastructure leads to a healthier economy. For example, the WEF’s EDISON Alliance, bringing public and private partners together to focus investment and initiatives, launched during Covid 19, has an ambition to improve the lives of 1 billion people through affordable and accessible digital services by 2025. Currently 2.6 billion people are offline impacting their access to education, health services and economic activity. As of January 2023, 454m people around the world had their lives positively impacted by the Alliance’s efforts.

Identifying the problem

It is possible to tackle the ‘S’ question by starting from the bottom up and asking ourselves the simple question ‘what is the problem we’re trying to solve?’ in our communities and for our planet; and then ‘how can we solve it?’ using existing market mechanics and sustainable, commercial approaches.  For example, launched in 2013 and now in its 10th year, the Columbia Threadneedle UK Social Bond Fund, developed in partnership with the Big Issue, focuses on investing to address the main areas of social need where social exclusion is particularly evident – its impact is all about the people affected by socio-economic and environmental issues. It demonstrates what can be achieved when social impact thinking is introduced at the inception of a fund and applied across its value chain and, subsequently, in support of industry best practice.

We need to recognise that if we fail to introduce ‘S’ into our thinking, we risk divorcing our ESG efforts from the fundamental realities of people’s lives.

We need to recognise that if we fail to introduce ‘S’ into our thinking, we risk divorcing our ESG efforts from the fundamental realities of people’s lives. We need to recognise that standalone environmental solutions ignore a crucial part of the equation – the people driving or being impacted by our shift to a greener economy within harsher climatic conditions. If we fail to demonstrate the relationship between people and the planet to achieve sustainable growth, then we risk polarising the debate as a series of trade-offs rather than an inclusive opportunity for all. With forethought, fresh perspectives and a more bottom-up approach, asset managers have an opportunity to deliver new propositions, appeal to a wider audience and drive long-term value that brings planet and people together.

Main photo: Big Issue staff at one of their centres in north London.

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