I recently wrote a LinkedIn post about our industry’s obsession with ESG data and measurement. When I last checked, the post had 32,200 views and more than 40 comments – by far a record for me as someone who dips in and out of social media and often finds it quite tiresome.
Clearly my rant resonated with the ESG and sustainability colleagues in my network – but why? I think it has to do with our collective exhaustion and frustration, as well as our realisation that our long hours and passion to make things better sometimes just isn’t enough. There are some hidden truths and realities that many of us working in the industry for 10 or 15 years (or longer) feel, but have not been able to express. Now that ESG and sustainability is genuinely a commercial product, all of a sudden, the spotlight is on us. And if we are going to continue to make a real-world difference, then it is critical we challenge ourselves and speak these truths, or our industry is at risk of becoming the posterchild of the next financial scandal.
Here are my main takeaways from that post:
ESG data is not data
There, I said it. Let’s stop pretending that what we are dealing with is data. In the vast majority of cases, it is not. It is opinion. Give two different people the same set of complex and nuanced information and you are almost guaranteed to get two different opinions.
Do I worry that MSCI and Sustainalytics disagree on how to score a company? Not one bit! In fact, I’d be more worried if they started to agree on everything. Imagine if brokers agreed all the time on their buy/sell decisions? We’d all be crying foul. There is value in disagreement. Diversity, disagreement and complexity is where the real change happens. We need to embrace uncertainty. Revel in complexity. Encourage debate.
ESG data and measurement won’t solve sustainability
Treating ESG information as data is a ‘dangerous placebo’, as Tariq Fancy would say. We will not measure our way out of the mess we have created as a society. It will take hard work, it will require systems change, and a change in what and how society values natural and human capital. Data and measurement has a place, of course! But it should not be the end goal. We need to be very mindful of what we are measuring, why we are measuring it, and what we are going to do with the results. I also passionately believe we need to hire more social scientists in finance to work with our data and quantitative scientists. Both camps have a lot to learn from each other.
If you care about sustainability, invest in active funds
Making meaningful progress on sustainability requires us to do something differently than we did yesterday, or last year. It requires active decision-making. It requires the ability to change your mind when presented with new facts, re-allocate capital, or exert significant pressure. You can only effectively do this by investing in active funds. The market will not naturally solve sustainability challenges, so neither will market-weight passive funds.
But, remember, finance will not save the world
I feel like this point needs reiterating. Of course, the finance industry has an important role to play. Many of us are in an incredibly privileged position to have a genuine impactful and long-lasting influence on how millions of people invest their money. But it is unfair and unrealistic to assume fixing finance will fix the world. We need to be honest about the limits of our influence and our dependence on entrenched social, political, regulatory and financial systems that were never designed with sustainability in mind.
