ESG – have we got it all wrong?

Professor Kevin Haines
February 2022

When it comes to the relationship(s) between concepts and data, I think I’m pretty good at spotting when its right or wrong – and I think we might have got it wrong when it comes to ESG and investing. I will try to explain:

Let me first of all say that businesses must make a profit. No profit = no business. Let me also say that I think ESG is brilliant. It is our greatest hope for the future wellbeing of humankind.

The problem comes when we link ESG to business (investment). Presently, when we link these two things together, we typically do so using the business (investment) model from the pre-ESG period, i.e. analysts are using ESG data to determine which ESG investments provide the strongest return for the given investment (mitigating risks etc etc etc).

What’s the problem? You might ask. Surely this is correct. It’s been this way for ever! Everyone does it this way.

Well, the problem is, in short, that ESG investing is not about data, logic, risk management, algorithms or numbers. ESG investing is about feelings. ESG investing is about hope. ESG investing is about doing good. None of these things are reducible to a simple number that leads straightforwardly to an invest – not invest decision.

ESG is, sui generis, an immensely complex concept, embracing an almost infinite set of known and unknown (unpredictable) variables. It gets even more complex when we consider, as we should, E+S+G – i.e. the interrelationships and interdependencies between E, S and G, plus the fact that these change over time. How could we possibly understand these complexities? How could we possibly simply reduce these complexities to a binary yes/no decision based on an algorithm?

These complexities are beyond the logical, analytical human mind, but they are well within the grasp of human emotion. Does an investment feel right? Does an investment enjoy particular ESG-related qualities that I, as an investor, value? Is this investment going to do more good than harm to people I care about? There are infinitely many answers to these questions (and others), the answers may be supported by data, but ultimately the answers come down to how we feel about them.

Be honest: how do you feel about the ESG/investment decisions you make?

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