Why the ESG acronym gets a thumbs down from Nanuk

Appearing on the latest episode of Relative Return, Nanuk Asset Management’s director and chief investment officer, Tom King, has shared why he discourages advisers from using the term ‘ESG’.

The active asset manager, established in 2009, invests in listed companies associated with the broad themes of clean energy, energy efficiency, industrial efficiency, waste management, pollution control, food and agriculture, advanced and sustainable materials, water, and healthcare technology.

“I don’t like the term [ESG] at all. I’ve been out banging the drum recently, encouraging advisers to stop using the term,” he said.

According to King, a lot of the negative sentiment towards investments in areas where people use the term, come from a lack of a common meaning.

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“It’s just an acronym and it gets used very loosely to describe a whole series of different things that can be done together but aren’t all compatible, and ultimately can’t be done well at the same time,” he said.

“Anyone dealing with clients who want to shape their investments by their values or want to ensure that their capital is allocated into particular things or not into other areas, those conversations and delivering those outcomes can happen without using an acronym that confuses everyone.”

A portfolio manager with over two decades of experience in equity funds management, investment banking, and private equity,  he believes there is a lot to be said for those trying to completely avoid the term ESG and talk instead in plain language.

He outlined that investing in companies delivering products and services that make the world more sustainable, investing in companies with low-carbon emissions, or even investing with managers using their position as custodians of capital to influence change are all “distinctive, different things”. 

“And there’s nothing wrong with that. In fact, you’ve got cases now in the superannuation industry that make it pretty clear that things like climate risk are risks that need to be considered,” he observed.

“Particularly, if your clients are concerned about that, ignoring those kinds of things is going to be at your own peril as an adviser. So there’s a really stark need at the moment for much more sensible conversation and [for] people to stop generalising everything under this term.

“I’ve used the analogy, it’s a bit like alternatives. When you and I have a conversation about alternatives, we could generalise it, we could say that alternatives don’t perform well as the managers claim, alternatives charge too many fees — all those criticisms. 

“But we wouldn’t go far into that conversation without getting very clear about whether we’re talking about property or long short hedge funds, or credit, or whatever it was and having a sensible conversation about something specific.”

King went on to explain why Nanuk rejected the acronym and does not use it themselves.

“What’s an environmental social and governance fund? Most funds that use the label do something they call ESG integration and that’s just the consideration of environmental, social, and governance factors in investment decision making or portfolio construction,” King said.

“People have been considering governance factors, and most active managers do, so anyone can call themselves an ESG fund if you simply mean ESG integration. That’s why there are these absurd statistics out there [of] professionally managed assets, ESG assets. 

“It’s because people, at some point in the process, cast an eye over governance and claimed the ESG banner.”

Click here to listen to the full episode of Relative Return.