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# 103 Here’s The State Of The Art Regarding ESG

This is my take on how responsible institutional investors act, in practice


One of my ongoing research topics is “ESG,” an acronym for issues that affect investment indirectly. “E” stands for “environmental,” and relates to issues that affect the depletion of natural resources and their sustainability for future use. “S” stands for “social,” and relates to issues that are of concern to the future of society, such as human rights, consumer protection and diversity. “G” stands for “governance,” and includes issues relating to how companies are run, such as the power/management structure, executive compensation and employee relations.

In my Post # 97 I said that while some people consider these to be moralistic issues, others don’t. Regardless, if they affect asset prices and prospects, they need to be taken into account in making investment decisions, whether the relevant time horizon is long (they’ll affect prices some time, but don’t seem to do so now) or short (they affect prices today). And so my interest in these issues is partly to understand the issues better and partly to understand how they affect individuals’ investment choices.

A private webcast recently had a small number of very well informed people discussing whether current institutional ESG investment practices are just box-ticking or whether they’re designed to have an actual impact. This was a virtual breakfast roundtable in London organized by Avida International (on whose advisory board I have served for some years). It was hosted by Avida partner Bart Heenk, who made the arrangements. The discussion was moderated by Sally Bridgeland, with Dame Elizabeth Corley making the substantive opening remarks before the dozen viewers joined in. Elizabeth and Sally are not only in the forefront of the subject; they have also had distinguished careers in multiple dimensions. And Elizabeth chairs the board of the Impact Investing Institute. So yes, there was a lot of substance in the hour or so involved.


These were the key points I remembered.

(1) Don’t get bogged down debating definitions of ESG. Use a definition that matters to you, and is relevant to how you think about these issues. It doesn’t matter if it’s a little bit different from what others adopt. (Now there’s a practical start!)

(2) There are many levels of execution, and there’s a useful way to classify them. The slide which this link leads to (Spectrum of Capital) explains them. Here’s my take on them.

It’s useful to distinguish three levels of involvement, tagged ABC.

A involves avoidance. You don’t invest in the related companies. By staying away, you have no exposure to practices you don’t approve of, and avoid any associated risks that may affect the price. At this stage you don’t own any positive action.

B involves a focus on benefiting all stakeholders. Here you engage with the company. This can be done even with a so-called passive (that is, indexed) portfolio, because the mere fact of holding an asset enables you to engage constructively as a shareholder.

C involves contributing to solutions to society’s ESG problems, through companies that are themselves actively engaged.

All of A, B and C are suitable for fiduciaries, that is, those who have a responsibility to manage a portfolio in the best interests of their investors. But if you are managing your own money (or are philanthropic in your outlook or practices) you can go further. You can look at situations where your expected return is lower, or your potential risk is higher, than the market average, because your goals now involve not just investment risk and return but also addressing societal challenges. It’s that aspect that is open to those responsible for their own investments, or at any rate for defining their own goals. In other words, for them it’s not finance first, it’s impact first. And that’s feasible for individuals, if you’re so inclined.

(3) How would you measure the impact? One point was made strongly: focus on output, not on input. In other words, look at results, not at analysis. This is particularly relevant for trustees who select managers to invest their portfolios. What you should look for in these managers is not their process (which they’re all good at explaining), but their impact. And that’s impact not in terms of pretty stories, but in terms of broader evidence.

In turn, that leads to the question of how impact can be measured. That’s a challenge, a subject still in its infancy. When there’s progress on broadly accepted measures, I hope to be able to report on it. Meanwhile, the website shows a 2019 “Report on technology-enabled impact reporting practice across the investing chain” that contains practical examples of companies that are in the forefront of doing this.

(4) In defined contribution plans it’s feasible to accommodate the desire of many members to have their investments reflect ESG practices. The problem is that, while those members want involvement in a general sense, they typically haven’t any idea of what exactly this means, or what’s feasible, or how to go about it. So simply asking them for their ideas is typically a hopeless cause: it’s too open-ended a question. If you’re going to ask, make sure you put your questions in the most straightforward language that can be understood by all. And offer a few choices, at most. The most practical approach is probably to design a default option that gives them broadly what they seem to want, and then they can simply say yes or no to that default option. Those who want to go further on their own usually have the additional option to do so.


It seemed to me that, given the knowledge of the participants in the discussion, I was privileged to look at the state of today’s art on ESG investing. If you are aware of deeper thinking or more practical action on ESG, do tell me about it.



There are many identifiable levels at which investments can be structured to take account of ESG issues. Measuring the impact is a subject still in its infancy.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

4 Responses to “# 103 Here’s The State Of The Art Regarding ESG”

  1. Ted Harris says:

    Don, I’ve been involved in ESG almost from the beginning, in Canada, then globally. I believe my observation is similar to yours and, having recently returned to a consultative role, I found that there are lots of papers and conferences, but there has not been, practically speaking, much change. From the policy side, investment is ultimately determined by any liability which could be attributed to a committee or trustees. For ‘pooled’ retirement funds this is as it should be – much as members want to ‘do the right thing’, they also need enough funds to retire.

    I recently was involved in evaluating a fixed income instrument, but it boiled down to finding a ‘philanthropist’ to back it, as there were no assets which could be valued in a viable market. There was a lot of good creative thinking, but straight philanthropy might have been a more straightforward and economical approach. Nothing wrong with a philanthropist saying ‘you get more if you meet these objectives.’

    The ‘E’and ‘S’ components, and sometimes the ‘G’, are subject to modelling in order to anticipate outcomes. As we hear so often today, modelling is an educated estimate of the range of outcomes, not a guarantee. We can never escape risk. Indeed, we all have interesting discussions with regard to climate change and its outcomes. On this topic I have friends all the way from those who are complete pessimists to those who are luddites.

    Practically speaking, years ago my research associates incorporated ESG into their valuations in that they wanted to know that management was thinking about it and including their findings in their forward planning. This is an ongoing process unless someone finds an absolute formula.

    One thing I’d like to say is that I would expand ‘E’ to include preservation of the biosphere which we need to exist. This definition is essential if future generations are going to have the opportunity to retire.

    Finally, I absolutely agree, let’s not get bogged down. Expanding our knowledge so that we can move forward is our only life sustaining option.

    • Don Ezra says:

      Thanks very much, Ted, for this first-hand perspective — worth reading as a stand-alone piece. I just have a couple of quick comments. One is that, as you confirm, it’s much easier to take ESG into account as an individual or philanthropist than it is as a fiduciary. The other is that it is indeed the biosphere that’s important — the environment simply reflects its health.

  2. Mike CLARK says:

    That was a good group you listened to. The Spectrum of Capital is very helpful. All I would say is that there is a lot of aspiration about impact. Engaging with evangelists (like me!) can disguise the lack of progress. We are struggling to get UK trustees to deal with climate change risk when it is clearly a financial risk. So anything beyond that is usually off the table in terms of portfolios, though proxy action covers more issues. But DWP are doing great work and law/regulation is moving in the UK as part of the government’s Green Finance Strategy.

    You may have seen signs of a change of heart from the SEC recently about softening their proposed (bad!) proxy proposals. Despite the SEC’s declared mission of protecting the investor, there is clear evidence of regulatory capture by corporate interests. I recall one SEC Commissioner referring to ESG issues in terms that suggested a commie plot!

    I hope you saw the recent Barclays AGM vote results. I have a role at one of the investing institutions that initiated the stronger resolution. And do keep an eye on the ExxonMobil AGM later this month where CA100+ are nicely involved. There will be some votes against the whole board.

    Increasingly I emphasis ESG risks, not ESG matters, or issues, or themes.

    We can be smarter about passive. A managing fiduciary (usually the in-house executive of a governing fiduciary) can specify their risk preferences (such as “tilt away from carbon risk”) and then beta becomes a choice. This is not well understood. The investment manager’s portfolio remains passive to the new risk profile. I can give examples. There is a big push by the Hewlett Foundation to tackle the “passive climate problem”. It arises because of the automaticity of low cost, outsourcing of risk management by the asset owner to the index provider (the asset manager adds a little value though implementation). It is only low cost in the short term. Deferral of risk management creates an externality.

    I will send you some stuff around SDGD, SDG disclosures. It has an excellent exhibit covering various reporting frameworks.

    I will also send you a link to the WHEB Asset Management Impact Report (I am involved there).

    There is a small but growing view in the UK that the DC default is a fiduciary decision and not considering e.g. climate risk could be a fiduciary problem.

    • Don Ezra says:

      Thanks very much, Mike. You have become my go-to person on the subject! I appreciate your availability very much.

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