From our perspective, the "backlash" against ESG could be classified in two categories. Analytically, there is a scepticism about the quality of underlying ESG data and the consistency with which it is applied. And fundamentally, from some quarters, there is a rejection of the concept that that investors can consider environmental and social externalities, when investing clients' money. Some ask: shouldn't they just maximize profits?
While one issue could appear to be more rationally driven, and the other more philosophical, we believe the two are linked. To begin with, we do accept as legitimate, the critique that ESG data vary, in terms of scope, reliability and coverage. That is why at Storebrand, one of major engagement priorities for 2021-2023 is to encourage better, integrated reporting from companies, and why we lead and take part in investor alliances to engage with ESG data providers, standard setters and regulatory authorities to improve data sets and reporting requirements for companies.
This approach is also illustrated by our work in championing the Taskforce on Nature-related Financial Disclosures (TNFD). The TNFD initiative is aimed at aligning the financial sector on a framework for organizations to report on and act on nature-related risks. Ultimately, this can shift global financial flows away from nature-negative outcomes and toward nature-positive outcomes. Across the financial sector, many efforts such as TNFD are underway, moving us from imperfect-but-useful ESG data to a state of much more precise ESG insight for financial decisions.
Yet, it's important to keep in mind that this is not about trying to find one rating, or one single source of truth. Even as ESG data is refined, it may still result in varying ESG ratings. While ESG ratings may differ, they are complementary and equally crucial for the investment decision. It is our role as investors to understand ESG ratings, just as we do with any other financial metric.
Should investors care about ESG? Well, we do. At Storebrand, our business is built around a long-term vision for the year 2050 as a world in which 9 billion people live well, and within the earth's natural limits. These values, aligned with ESG, are integrated into our business, and are well received by our stakeholders, including customers, employees and society at large.
But what if some investors or businesses don’t buy into those values, subjectively? What if they believe in Milton Friedman's philosophy that "the business of business is business". Well, at a fundamental level, investors need to know and build strategies, based the nature of the business risks and opportunities that are invested in. We believe that sustainability exposures – environmental, social or governance events or conditions – can materially impact the value of investments.
Increasingly, many dimensions of sustainability exposure, involve systemic risk, such as climate change, and biodiversity loss, which could undermine value creation across regions and even globally. Ultimately, ESG enables us to understand these issues, and provides a foundation for action on managing them from social, business and investment perspectives. With that in mind, for an investor, sustainability becomes an unavoidable dimension of the equation, regardless of subjective values. We do need to know, and to integrate ESG, in the search to deliver better risk-adjusted long-term returns for our clients.
