What’s in a name? – an ESG polemic

by , 14th November 2018

In response to BlackRock iShares recent high profile move into ESG funds, Mark Northway from Sparrows Capital suggests that naming conventions on ESG matter – and that BlackRock are confusing matters with a lack of consistency.

The world of sustainable investing is complex and is made more complex by the lack of standardisation and inconsistent naming conventions. Blackrock has managed to confuse the issue further still by completely reversing nascent market terminology.

Traditionally the ESG process focuses on specific environmental, social and governance risks to which a business may be exposed and is essentially a scoring mechanism designed to systematically enhance due diligence processes. Portfolios are skewed away from capitalisation weightings according to their ESG scores. It is industry agnostic and is intended to improve portfolio performance.

The SRI process traditionally overlays an ESG scored portfolio with a screening process designed to eliminate ‘vice’ industries and ‘sin’ stocks. This overlay is effectively the application of social conscience and is not specifically designed to enhance performance.

The new iShares product suite applies a thematic SRI screen to popular MSCI capitalisation weighted indices without using ESG score to adjust the stock weightings. This results in a closer correlation to the underlying capitalisation-weighted index performance, a flat cost relative to the existing iShares ETF range, and a product which will address the consciences of most socially responsible investors. A good product very useful choice for investors for no incremental cost.

So why on earth confuse everyone by calling the new product ‘ESG Screened’. ESG scores are completely absent from the index and portfolio construction process. Lip service is paid by measuring the new portfolio’s ESG score, but this is an output from the process, not an input. The new products are thematically screened for social responsibility, not ESG screened.

We need more consistency, not less, in this arena. Naming conventions should be driven by the index providers (MSCI appears to have dropped the ball here) and rigidly adhered to by market participants. They should not be led by marketing sound bites.

Mark Northway is a seasoned practitioner in financial markets with wide ranging managerial and governance experience across credit, fixed income, equity and treasury markets. His knowledge spans multiple disciplines including marketing, trading, investment and the management of complex financial and regulatory risk. He has previously worked for LBBW, Rabobank and Standard Chartered Bank, and chairs ShareSoc (The UK Individual Shareholders Society).