February 1, 2019

Is The Move To ESG Investing Fake Or Real? How Asset Owners Should Address This Question

“With the rising awareness around ESG issues, institutional investors have started to massively look into responsible investing…..”


Fake or Real?

If you believe what you read in the media, a ‘massive’ shift to ESG investing is taking place. This shift to focusing on environmental, social, and governance factors promises to enhance investment returns while making the world a better place at the same time. Is this true or fake news? Last month's Letter proposed a simple test to answer this important question. It is to carefully study how asset owners tell their value-creating stories to their stakeholders. Unless these stories are clearly credible, the ‘massive move to ESG investing’ becomes just another case of investment industry hype triumphing over reality.

Last month’s Letter also explained why we should focus on the behavior of asset owners. Regardless of whether they are pension, endowment, or sovereign wealth funds, asset owners have a fiduciary duty to create value for their stakeholders. Collectively, they sit on top of the financial food-chain, and where they go others follow.  And how to assess if their value-creating stories are credible? The Letter’s answer was: by using the Integrated Reporting Framework promulgated by the International Integrated Reporting Council (IIRC) in December of 2013. While the original Framework context was value-creation in the corporate sector, the Letter showed it is an equally powerful guide in the asset owner sector.

Why is the <IR> Framework so powerful? Because it requires asset owners to clearly explain why they exist and what ‘value creation’ means for them and their stakeholders.

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