SOCAP Spotlight: Using ESG for good, not for evil

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Guest Author

Rehana Nathoo

ImpactAlpha, Oct. 4SOCAP is back in person this year and the conversation around ESG will be lively and urgent.

I’m thrilled to be a part of a session entitled “Greenwashers Beware: Using ESG for Good, not for Evil.” I’ll be joined by Ander Iruretagoyena from Impact Engine, Yusuf George from Engine No. 1 and Jessica Matthews from J.P. Morgan. 

We’ve all watched as politicians and spotlight-hungry fund managers lead a poorly-reasoned attack on the ideas of holistically assessing risk, working for all stakeholders, and shifting corporate interests from short-term cost-cutting to long-term value creation.

And we’ve seen lazy fund managers inserting the words “ESG” into all of their products while charging double the fees for none of the work. 

Together we hope to offer our own experiences using, integrating and improving ESG analysis so we can collectively stop the greenwashers and naysayers in their tracks. 

Indeed, we’ve watched catalytic leaders, investors, and entrepreneurs hit back hard – with unprecedented transparency, bold capital commitments and innovative new products. There’s something in the air – a dogged determination to protect this hard-earned momentum with decisive action. 

At Spectrum Impact, we work with stewards of capital – in their many forms – to build impact investing strategies that are rigorous, long-term and measurable. And we engage often in the ESG debate. To effectively push back against what feels like rampant greenwashing and misguided naysaying, we need to get back to core principles.

Leading up to our discussion at SOCAP, here are a few things we’re thinking about: 

Your ESG isn’t my ESG

It’s human nature to crave simplicity. We want an easy-to-remember and even easier-to-use roadmap of what to do in our pursuit of “impact.”

It’s part of the reason why materiality is often missing from high-level conversations. Materiality suggests that there are certain factors, informed by your business model, geography, sector, etc. that specifically affect your choices. 

Let’s say you’re a company who uses raw inputs to develop a product. The conservation of finite physical resources might be a critical concern for you.

But if you run a single-office financial services firm, then who you’re banking, how, and through what means could matter more. And frankly, you’re probably thinking more about place and community than your carbon footprint. To these two companies, ESG means something different. 

Talking about ESG without this nuance ignores the important work of considering what – exactly – you should use to assess the risks of the world on your business (and your business on the world).

Lean In, Don’t Opt Out

In the last two years, we all have been reminded of how woefully underdeveloped our care economy is, how much we ask of our frontline workers (and how little we give them in return), and how we continued to degrade our natural environment.

We could spend hours going back and forth on the efficacy of a carrot vs. stick approach to enact long-term change. In some domains, leading by example (through exclusion) has proven deeply necessary. But in the broader investment universe, the carrot might be the more sustainable approach.

Investors that actively engage with poor ESG performers (through ownership) can influence, push, cajole and convince in a way that those who abstain cannot. And the public markets have demonstrated time and again that one investor’s choice to opt-out is another investor’s opportunity to pursue value.

While an active strategy is not appropriate for everyone, guiding companies on exactly how ESG integration will ensure their long term viability is hard, slow, hands-on work. Someone has to do it.

ESG is not Impact Investing

We’re all weary of yet another discussion about terminology. But this conflation is responsible for so much of the frustration in this space.

In the work we do at Spectrum Impact, ESG is a type of analysis. It uses environmental, social, and governance factors to make decisions. Those decisions could lead to changes in how you run your business or who you invest in. For us, it is the best framework we have to holistically assess risk. 

Impact Investing is an outcomes-driven investment approach. It guides the intention behind your investment choices, and creates a multi-faceted framework to analyze success. It’s also a part of the double bottom line universe, so yes, considering financial performance matters.

You can be a comprehensive and effective user of ESG analysis and never call yourself an impact investor. And you can be an impact investor and fail to use ESG analysis in your processes and systems. 

The deeper we understand this, the easier it’ll be to create a set of tools and frameworks that everyone can use – regardless of where they are in their impact journey.

Rehana Nathoo is founder & CEO of Spectrum Impact.