Has ESG label become too overloaded among investors?

With the ESG label often causing confusion among investors, Nanuk Asset Management has encouraged financial advisers to use more plain, specific language with their clients.

Responsible Investment Association Australasia (RIAA) research in 2024 discovered that 88 per cent of Australians expect their investments to be responsible and ethical, up from 83 per cent in 2022.

As the demand for responsible and ethical investment grows, Nanuk Asset Management noted the broad umbrella term “ESG” – an environmental, social, and governance framework – has been misunderstood by some investors.

Speaking on a recent IMAP webinar, Mark Jordan, senior business development manager at Nanuk Asset Management, said confusion around the term has prompted some Australians to abandon it altogether.

“The argument here is not against ESG practices, but against using the term to describe a range of different investing approaches. We think it’s caused confusion and misunderstanding when clients or advisers are looking at different investment options that align with objectives,” Jordan unpacked.

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“We’ve seen this problem arise over the past few years and it’s caused some investors or advisers to shy away completely from the responsible or ESG investment sector.”

Similar to the way that alternatives cover a range of non-traditional investment options, ESG too describes a wide array of strategies, Jordan said, such as negative screening and exclusions, impact investing, or sustainable investment.

“When it comes to managed funds, this is where the ESG acronym has become probably overloaded. It means different things to different people, from exclusions to ethical screening to risk management and active ownership,” the senior BDM described.

“We think about the way the term has been used a little bit like using the term ‘alternatives’ to describe a broad and diverse range of investment strategies. Alternatives might be hedge funds, property, credit, infrastructure, and so on. It tells us very little about what the investment strategy is so when someone mentions the term alternative, there’s more questions. What are you talking about?

“That same thing needs to take place when we’re talking about ESG or responsible investment.”

To avoid overusing this umbrella term, he encouraged advisers to use more specific and plain language descriptions with their clients to clearly define their objectives.

This could include:

• Exclusionary, values based negative screening
• Systematic consideration of governance and sustainability traits
• Engagement and stewardship activities
• Sustainably themed investment
• Low carbon investment
• Climate change and climate transition alignment
• Impact investment

Jordan added: “The term ESG, or for that matter responsible investment, should not necessarily be used to represent a single concept because it doesn’t.”

Referencing RIAA’s research, he said the rising demand for ESG investment is a key opportunity for advisers to provide further value and engagement with their clients on this topic.

“I’m pretty certain, I could be wrong, that advisers are not having these conversations with 88 per cent of their clients, so there may actually be an unmet objective that can be addressed in the advice process.

“As the younger demographic starts moving through the investing lifecycle, we would see that demand shift higher and there’s probably going to be a range of new funds and strategies that will actually come to market to suit investors going forward. There is demand, just in the short-term it can ebb and flow, but the long-term structural demand is growing.”