In Focus: Megatrends  

'ESG separation is beginning to unfold'

As a result, valuations have gone way up around anything related to ESG because with the hyper-sensitivity around this area of the market, everyone thinks they need to be ESG compliant, when in fact it’s the overcompensating that is almost putting them in risky waters.

We’ve seen substantial growth among exchange-traded funds and mutual funds in particular, with the valuation of certain companies drifting unsustainably upward. This is where greenwashing is coming into the mix.

These inflated figures are far beyond what they actually should be and it’s becoming misleading for advisers and investors.

The right move is not to align with a full portfolio as the BIS warned. Instead, determine if you’re involving yourself in the ESG arena because you genuinely want to do good and only invest in sustainably-focused companies, or if you’re focused on ESG solely for the returns.

FTA: Should ESG factors be unbundled and how could they be regulated individually?

SN: There are pros and cons to both approaches. As the ESG sector continues to grow and become more specialised in its data and measurement factors, it will be almost impossible to have all three elements sit under a single umbrella because they are already becoming very different in nature.

Governance is fairly straightforward. It needs to be centralised in the decisions and the board of every company. In my opinion, governance is already becoming somewhat of an outlier in ESG pigeonholing.

Environmental, very simply, looks different for different companies and different industries, and as a result for different advisers and investors.

Social is playing such a large part in today’s society that it’s starting to be examined as its own entity. Each of the three has a completely different set of metrics and all three are becoming harder to manage and regulate as one unit.

I expect to see a gradual separation of the three of them in the coming years with companies and industries meeting minimum disclosure requirements across broader ESG while stressing more on ESG issues that is of higher relevance and applicable to their specific industry and business practices. I think that process is already beginning to unfold.