The business case for ESG investing is a strong one based upon financial returns as shown in research by George Serafeim from Harvard Business School. I worked on a research project regarding banks using his approach with the Global Alliance for Banking on Values along with Deloitte and the European Investment Bank. This research showed a better ESG focus delivered better financial returns (see report here).
However, it is possible that a focus on financial returns dilutes the real mission and goal of impact investing, delivering positive impact on society. Whilst it is a “nice to have” if financial returns are better, those returns should not overshadow the core reason for values-based investing which is improving society relative to economic prosperity, social empowerment and environmental regeneration.
This dilemma and challenge was very helpfully discussed in an opinion piece in the Financial Times. Jonathan Ford, the author, correctly notes: “‘(i)mpact’ investment only has real meaning if it means funding activities that would not otherwise happen.” He provides several examples of “greenwashing” in his comments. But most importantly he reminds us of the basic fact – impact investing should not be primarily about financial returns but about delivering impact. As he notes: “. . . why does everyone want decarbonisation, fair wages or the encouragement of diversity on boards? Not because they raise returns but because they are the right thing to do.”
Balancing the mix of impact, return and risk is a challenge but one we should embrace with all its complexity and ambiguity.
