Sustainable investing terms are brandished ever more frequently. Whether short and snappy (ethical, impact) or a total mouthful (environmental, social, governance investing) here they are at the forefront of minds, conversations and marketing collateral right across the investment chain.
It's concerning that the same terms our investment professionals struggle to define are being used to explain the impact of ISAs and pensions to everyday investors – people who might not even know what investment means in the first place.
The terms may be coined already, but how we interpret and explain their meanings is still up for debate. And so ESG scoring takes the floor...
Metrics upon metrics upon metrics
Fund managers often use qualitative data to make investment decisions but because they look at vast numbers of companies everyday quantitative data is also very useful – allowing them to compare companies like for like on different metrics. These comparable metrics, when applied to social, environmental and governance issues, are often referred to as ESG scores.
While ESG scores might be useful for fund managers, everyday investors have very different characteristics and very different use cases. Generally, they have less understanding of nuance, lower capacity to intake information and make comparisons, and less time to dedicate when investing isn't their day job.
I know what I hate, I know what I love
We user test with real investors every week at Tumelo. From those sessions, it's clear that investors don't benefit from ESG scores.
- Firstly, individuals have pre-disposed ideas about which companies they like and don't. Just like you, they have grown up with the milk formula controversy at Nestle and news stories about the working conditions in Amazon warehouses. Increasingly, they have been educated in schools where climate change is part of the curriculum, so big coal is a "no go".
- Secondly, scores aren't tangible or relatable to the average investor... adding abstract metrics to the abstract financial services sector. While sophisticated investors might get their head around AAA/AA/A, BBB/BB/B, CCC/CC/C; 4 globes out of five; and the 17 SDGs with 169 different targets, the average investment customer is more confused than when they started. And, presented with so many choices, likely to make no decision at all.
- Thirdly, investors just don't trust us. Financial services remains the least-trusted sector measured by the Edelman Trust Barometer. That fact means very few people will take the score (whether a number, letter, colour, star or globe) on your fund for granted. They will want to look under the hood; they will want to know why. But they won't get lost in the evidential factsheets or their investment portal, they will just google it.
Ok, investors don't get ESG scores, but we can't just give up. To reform the FS system, to engage our customers, to improve their outcomes - whatever your driver - we must help investors understand the impact their ISAs and pensions have on the world. But how?
Moving the needle
Our default in financial services is to provide investors with more information. Information that explains absolutely everything but helps investors understand basically nothing. What if we changed that paradigm? What if we gave investors the most basic detail - the names of companies in their fund - and asked for their opinion on those companies?
A company name instead of an ESG score means investors can relate from their own world view; investigate based on their own personal interests and form their own opinion.
A question instead of a factsheet means investors can feel connected to their companies; feel closer to fund managers, and tell us where they are coming from.
At the end of the day, everyday investors are of course seeking a return. They may want to own Amazon despite the warehouse conditions; they may believe Nestle is on the right track; that coal companies will be part of the sustainability transition. Whatever their thesis, ESG scores aren't helping investors to make these important decisions nor tell their providers why they have made them. Without that feedback loop, financial services can do nothing to build the products everyone else needs, wants and understands - instead we'll be stuck with jargon and abstract labelling.
There is so much knowledge buried in the brains of fund managers that investors are super interested in. Let's start by making some of those decisions more visible, opening up a two-way conversation and innovating for the everyday investor, not the industry.