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Defining ESG

Published on 26/11/2020

The nice thing about learning something new is that you can research it. You can find the definitive parameters and definitions and read them a bunch of times before sitting back and saying, “yeah, ok. I get it”. Well… continuing our ESG series, we find out that this is not necessarily true of ESG investing.

You can catch our earlier ESG articles here: What is... ESG, and The Rise of ESG.

ESG is one of the fastest-growing topics in investing, so you’d have thought there would be a defined set of rules; tools that investors and companies could measure themselves by. Well, no. ESG investing is values-based, and values are a tricky thing to measure (just ask us, we’re measuring ideas…).

For example, some consumers might not mind buying hand soap in a plastic bottle with a pump (pumps are presently not recyclable across most major brands), whilst others may think this is abhorrent, and stick to the non-durable, slip-in-the-shower soap bar. Some consumers might be ok with using cling film or saran wrap, whilst others see this as repellent and instead use reusable beeswax wraps in their place.

As with things in our home, the same goes for ESG investing. Whilst some may find it fine to invest in a large aerospace and defence company because they treat their employees with dignity and respect, they have diversity on their board and they offset their emissions, others might find it repugnant to invest in them because they produce machinery and ammunition for warfare which ultimately can maim or kill people.

There is always a choice. And with ESG, the choice is yours.

There are a bunch of research tools available online to help at-home analysts figure out how ESG friendly the companies they are researching are. MSCI for example, has an online ESG rater, allowing analysts to search for a company’s ESG rating from leader (AAA and AA scores) to laggard (B and CCC scores). But we get to that sticky subject again, there is no standardised definition of what good practice is. MSCI and ESG Enterprise’s definitions of good practice may not reflect that of other indexes or companies, investors or even your definition.

The definition of what you feel comfortable with when buying or even creating an investment idea, or indeed investing in an ESG fund is up to you to draw up. And research is the key, however, this throws up another issue - size bias.

ESG ratings often show a bias that gives larger firms better ESG scores. This isn’t because the larger firms are doing more to help combat environmental or social violations, it's often more the result of them having larger resources on which to develop and then report on their policies and pursuits. And policies can also in themselves be misleading - tobacco firms or oil companies with deeper pockets than others, could obtain high or above-market-average ESG scores driven by their policies alone.

A final issue is that ESG data is not regulated in the same way that financial data is. It’s important to remember when researching, that ESG data is an opinion, not cold hard facts like profit margins are.

So, whilst ESG doesn’t have an overarching definition, we each have our own personal definitions; what we accept and what we reject. At Upside, we cater for everyone’s tastes because an ecosystem isn’t an ecosystem without choice.

At Upside we believe in full transparency when it comes to the funds we are building - you'll always be able to see what you're investing in and why the stock has been picked allowing you to make the right decision for you.

There’s an Upside to choice and a science to being right.

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