If there is one thing that supporters and opponents agree on about ESG, it might be that there are too many interpretations of its meaning.
This week, several groups, including the CFA Institute, gave a list of definitions that they want to be standard across the industry. That includes common meanings for terms like “screening,” “ESG integration,” “thematic investing,” “stewardship” and “impact investing.”
A lack of clarity can hinder communication and contribute to perceptions of greenwashing, the CFA Institute stated.
“Words matter. How we describe things matter. And the nuances of conversation matter. We want to be understood for what we are saying,” said Maria Lettini, CEO of US SIF: The Sustainable Investment Forum. “Having some consensus on definitions on some of the key areas we refer to … is really important.”
Defining ESG integration and impact investing could be crucial in ensuring that supporters have a unified meaning to present to critics. Numerous Republican state governors and members of Congress have held inquisitions on ESG as part of a wider push against sustainable investing. Often, ESG is equated by opponents with impact investing or socially responsible investing, rather than a means of assessing financially material risk and opportunity.
In the definitions the groups issued this week, “ESG integration” means “ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim to improve risk-adjusted returns.”
Meanwhile, “impact investing” means “investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return.”
Further, “screening” means “applying rules based on defined criteria that determine whether an investment is permissible.”
Having common definitions within the sustainable investing world “is long overdue,” Lettini said. “It was probably overdue even prior to some of the backlash we’ve been seeing over the past year or two.”
That political backlash appeared to have quieted down somewhat leading up to the possible government shutdown in September, but there's been more activity in recent days.
A group of 26 Republican attorneys general has indicated that it will appeal a recent U.S. District Court decision that upheld the Department of Labor’s rule governing ESG use in retirement plans. The group had sued the DOL on behalf of their states in January, seeking to have the rule invalidated.
Individual states have also published blacklists of asset managers they say boycott the fossil fuel industry, with some moving to cut business ties with those investment firms. In Oklahoma, there's a battle percolating between the Oklahoma Public Employees Retirement System board and state Treasurer Todd Russ, who has tried to prevent the pension from working with certain asset managers.
And on Wednesday, the House Judiciary Committee sent subpoenas to two groups: shareholder advocate As You Sow and Glasgow Financial Alliance for Net Zero, or GFANZ. Chair Jim Jordan, R-Ohio, has accused the groups of failing to fully respond to document requests that are part of the committee’s “investigation into potential violations of existing antitrust laws through collusive agreements to promote and adopt left-wing environmental, social and governance goals.”
Similar letters have been sent to proxy advisory firms Institutional Shareholder Services and Glass Lewis, as well as investment firms Engine No. 1, Trillium Asset Management, Arjuna Capital and Aviva Investor Americas, As You Sow noted in a statement responding to the inquiry.
Many in the sustainable investing world have emphasized that ESG criteria have financially material implications and are not promoted solely out of environmental or social beliefs. However, a refrain from the right has been that ESG is all but synonymous with left-wing agendas that allegedly end up hurting financial performance.
As You Sow president Danielle Fugere said in a statement that the group would answer reasonable questions from the House committee, but called the subpoena “flawed, with demands that are inapplicable to As You Sow” and “so broad as to be virtually unbounded.”
The request covers documents related to its work with public companies related to climate risk, the group said. As You Sow engages with companies and files shareholder resolutions that have ESG foci.
“Shareholders have a right to engage in climate-related discussions with the corporations they own. Shareholders also have a legal right to file proposals to elevate critical concerns,” Fugere said. “The committee’s new antitrust theory — which appears to be that shareholders must not ask about or act on material risks associated with climate change — inappropriately injects the committee’s judgment into private sector business decisions.”
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