Bundling topics unnecessarily complicates fund managers’ decision-making
General Electric is doing it. And Toshiba. And J&J. Breakups are in, and with good reason: individual parts of sprawling corporations are better managed on their own and might be worth more separately. But the biggest spinoff of 2022 won’t be company-specific. It is time to separate the letters of the acronym ASG.
It stands for Environment, Society, and Governance, and it first appeared in a 2005 UN report. It was a practical way of pressuring investors to invest in solving community problems they were ignoring for the bottom line. It seems that it has worked.
But lumping topics unnecessarily complicates fund managers’ decision-making. Nearly 60% of investors surveyed by Natixis Investment Managers believe they have a responsibility to help solve social problems. But a larger majority, 78%, say it is primarily the responsibility of governments.
Companies that do well on carbon emissions, or A’s, may fail on board diversity. On the other hand, they may prioritize shareholder returns over sustainability or improving maternity leave, and call it good governance. The aggregation of ASG metrics makes it possible to mask failures in one domain with results in another. Unlike corporate debt ratings, ESG scores vary widely depending on who does the measuring.
Many investors prioritize climate, an area where financial investments can have a direct and measurable impact, and which lacks country-specific cultural values included in social justice measures. But companies that are sincerely committed to tackling all three problems are avoiding a blanket approach anyway. “A, S and G are not natural bedfellows, and we don’t use that language,” says Alan Jope, chief of Unilever. “We should not look too much at the label, but at the acts that are underneath.”