On a recent episode of InvestorDaily Uncut, Mr Higgins said that there has been a growing focus on environmental, social, and governance (ESG) factors, and noted that while the litany of terms associated with ESG can be perplexing, at its core, it’s a fairly straightforward concept.
“ESG is a pretty big overarching label in the industry. And at the end of the day, too many labels are sometimes difficult when you’re trying to talk from the top-down,” he said.
“But we look at it and say, it’s pretty simple. ESG, in its purest form, is really just a way of looking at a company, or a fund, and understanding what all the impacts outside that company through those E, S, and G lenses mean for enterprise value. It’s really looking from the outside inward.”
Mr Higgins, on the other hand, explained that sustainability involves evaluating a company’s impact on the external world. It, he noted, is an outcome, not a process.
“If you want to sum it up, we would say ESG examines the world’s impact on a company, but sustainability examines a company’s impact on the world,” he said.
Mr Higgins explained that confusing ESG with sustainability has led to many arguments, as the two concepts are linked but not identical.
Providing the example of British Tobacco, he said the inclusion of this company in major ESG indices has led to arguments that ESG is being greenwashed, but, Mr Higgins reiterated, ESG “does not have a green or moral filter”.
“It’s not looking at a company like British Tobacco and saying that there is a moral transgression in what that business is doing. It’s looking at the risks through those E, S, and G lenses on that business’ enterprise value and making a call on whether or not they think that business is well positioned to handle it,” he said.
On the other hand, he explained, waving the ESG flag does not automatically make a company sustainable. Fund managers, he advised, need to distinguish between funds that focus solely on ESG as a process and those that aim for sustainability as an outcome.
Mr Higgins suggested that advisors and asset managers can best align their clients’ values to ESG investment strategies by first distinguishing between ESG and sustainability and then narrowing down the universe based on the client’s preferences.
Tune into our podcast with Mr Higgins here.
If you would like to hear from Mr Higgins in person, join us at our ESG Summit 2023.
