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Is “ESG” a consumer-friendly term?

24/02/2019

 

How does one name a type of investment in a way that reliably reflects its remit? With difficulty, is the short answer. Arguably, it is even trickier to get this right in the responsible investment realm. We have found in previous research that private investors can take “sustainable” in a fund name context to mean it is an investment for the long-term, or one that aims to be slow and steady. “ESG” and “SRI” are problematic simply by virtue of being acronyms. When asset managers don’t spell things out, some potential investors don’t feel comfortable. They worry about lack of transparency, a possible tendency to hide behind jargon and maintain an air of superiority through misdirection and sleight of hand.

Spelt out, “environmental, social and governance” is helpful in informing people what it’s all about. Yet it still alludes full comprehension, continuing to be used interchangeably with “ethical” even by professional investors. And, of course, it is a bit of a mouthful.

As a more light-hearted – but still insightful – component of our private investor research on responsible investing, we asked the 1,001 investors surveyed to tell us what they think ESG stands for in an investment context. We also requested that they avoid Googling the answer (where’s the fun in that?).

Two fifths of investors did not venture an answer for “E” or “S”, and a slightly higher proportion were thrown by the “G”. Just over a tenth (13%) of private investors can correctly spell out ESG unabbreviated, with a little flexibility given by us for very close answers (“environment” instead of “environmental”, for example – we’re not harsh markers here at RiF).

After “environment”, “environmental” or “environmentally”, popular guesses for “E” included “ethical”, “economic” and “estimated”. After “social”, “sustainable”, “standards” and “savings” were common suggestions for the “S”. For “G”, popular wrong answers included “growth”, “group”, “guidance” and “guaranteed”. No prizes go to the private investor who thought it would be witty/clever to suggest “egg”, nor the investor who wrote in “sausages” (incredibly, not the same individual).

Among private investors, awareness of ESG is growing from a low base. There have been quite a few FT articles on the subject in the last year and also some in specialist investment mags, which has played a role in informing investors. Yet is the term really the one to take this kind of investing mainstream? Should it be used mainly as an industry term, rather than one that makes top billing in ads and brochures?

There is work both at the EU level and within the UK’s Investment Association to create a taxonomy for ESG-esque funds. We are all for this, as better-defined criteria will improve the quality of investments in this area and set categories will help professional investors to benchmark performance where comparison with ‘other’ funds isn’t so appropriate (perhaps for positive impact funds, for example).

Yet in the consumer context, too much focus on taxonomy may put people off. They don’t need sub-genres for a new type of tune they’re just starting to hum. Would “responsible” be the word to have front and centre?

For our Responsible Investment Review report, we have interviewed over 60 experts, including around the topic of tools and methodologies fund managers rely on to construct ESG funds, and what investors who are keen on aligning their investment with their values of beliefs might expect. For more on benefits and downsides of different ESG research processes and to find out more about the report, please get in touch with the team by email here.

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