Risks vs. rewards: How ESG investing is trying to bridge the results gap

ESG has caught an increasing amount of flak lately over whether it actually lives up to its billing as delivering better sustainability outcomes. Some of its critics are missing the point, say members of the investment community.
Risks vs. rewards: How ESG investing is trying to bridge the results gap

The “E” in ESG investing stands for “environmental”, but to Hans Taparia, a clinical associate professor at New York University’s Stern School of Business, it seems just as likely to refer to an empty promise.

In a recent opinion piece written for The New York Times, Taparia argued that the entire notion of ESG investment had been turned on its head to serve not the interests of the planet and its inhabitants, but only the interests of maximising return on investment, regardless of whether those investments had any positive environmental or other impact. Taparia did not reply to a request for comment.

Hardik Shah

As standards for ESG data disclosure take shape in the form of the much-anticipated first draft of International Sustainability Standards Board (ISSB) baselines, much debate in the space has coalesced around these concerns.

“What differs is whether you take an integration approach – which means what kind of impact environmental and social issues could have on a company’s financials – or the other way around – what kind of impact the operations of a company are having on the environment and society,” Hardik Shah, a Singapore-based ESG practice lead at US-headquartered asset manager GMO, told AsianInvestor.


Among nine investment community participants interviewed for this story, views were mixed on the extent to which ESG strategies in their current form could serve specific environmental and social goals, although all of those interviewed expressed hopes that the field would move beyond mere risk mitigation for investors to deliver broader positive impacts.

Some were optimistic, such as S&P Global Ratings’ Asia-Pacific head of sustainable finance Bertrand Jabouley: “Even though the focus is currently on risk, it doesn’t mean there are no implied benefits, because if you’re doing a great job at managing risk, it probably means that you’re also having some positive impact.”

Still, two key challenges remain for investors’ ESG efforts: measurement and standards. Many pointed to the limitations of ESG scores issued by some ratings agencies.

Nazmeera Moola
Ninety One

Shah; Nazmeera Moola, chief sustainability officer at South Africa-based asset manager Ninety One; Danielle Welsh-Rose, head of sustainability for Asia-Pacific at Abrdn; and Alexandre Chavarot, a strategic financial adviser to the Coalition for Climate Resilient Investment who lectures at Sciences Po and Cranfield School of Management all told AsianInvestor that assessments such as ratings, despite their at-a-glance utility, represented only a starting point when it came to measuring ESG performance.

“Ratings are really designed to be an input among other inputs into the investment process,” Welsh-Rose said. “What institutional investors are becoming much more interested in are real-world impacts, such as moving away from a focus on carbon footprints to real-world emissions reductions.”


The desire for real-world results among the investment community and mounting public concern over the climate crisis, in particular, are what have led to the drafting of ESG disclosure standards by the ISSB. The board says it hope its first draft of the standards will be finalised “as early as possible in 2023”, a consensus in the ESG field that Moola expected to be widely adopted over the following five years. She noted that agreement on their content remained a subject of debate.

“The ISSB is already at the point where they’re probably not going to opt for double-materiality,” she said, referring to the concept that companies’ ESG impact must be measured both by how their activities affect the environment and society, as well as the standard ESG metrics.

The issue of double-materiality is at the heart of a debate over the extent to which companies should be required to disclose their emissions. The argument is centred on the types of emissions involved: whether directly from a company’s business activities, indirectly from such sources as the electricity that a company purchases, or those indirectly produced as a result of upstream and downstream activities in a company’s value chain – respectively referred to as scope 1, 2 and 3 emissions.

Chavarot welcomed the prospect of standards for sustainability, but said that assessments through ESG standards of whether businesses were performing sufficiently well were complex not only due to long-standing issues of data comparability, but also the multifaceted nature of ESG itself.

“One should go beyond the amalgamation of environmental, social and governance parameters,” he said. “A one-size-fits-all approach is unlikely to tell investors how well a company is likely to perform.”

Charles Yonts, head of Asian ESG research at Macquarie Group, echoed that sentiment, saying: “This is not like a profit and loss statement. You can’t just start out with carbon emissions and then add in some human rights issues, and then a board structure, and get a number. However, having ISSB reporting standards to focus on will be very critical and very welcome.” 

He also said that standards would mean regulation, and suggested some companies were trying to prevent the development of new government rules, while simultaneously presenting themselves as advocates of rule-making in an effort to avoid the need for proactive action by industry participants.

“Some companies and individuals arguing for only government intervention and no action before that are also advocating actively against governments intervening,” he said. “So while saying, ‘Look, we can’t do this unless the government says so’, they’re actively lobbying governments not to enforce anything – and that’s the most pernicious form of greenwashing.”

Thomas Kuh, head of ESG strategy at Morningstar Indexes, said that despite criticisms of ESG investing, the industry’s efforts over three decades had contributed to progress on making ESG issues a key component of investment decision making.

“I've heard critics say, for example, ‘Look at the state of the world. If sustainable investment is such a great idea, why aren’t things better?’ My response is: Where would the world be had we not been doing this for the last 30 years?”

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