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T H E E S G I N V E S T I N G H A N D B O O K
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THE ESG 
INVESTING 
HANDBOOK
insights and developments 
in environmental, social & 
governance investment 
Edited by 
BECKY O ’CONNOR
harriman house ltd
3 Viceroy Court
Bedford Road 
Petersfield 
Hampshire
GU32 3LJ
GREAT BRITAIN
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First published in 2022.
Copyright © Harriman House Ltd
The right of Becky O’Connor to be identified as the Editor has been asserted in accordance with the 
Copyright, Design and Patents Act 1988.
Hardback ISBN: 978-0-85719-951-5
eBook ISBN: 978-0-85719-952-2
British Library Cataloguing in Publication Data
A CIP catalogue record for this book can be obtained from the British Library.
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Whilst every effort has been made to ensure that information in this book is accurate, no liability 
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information contained herein.
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a result of reading material in this book can be accepted by the Publisher, by the Author, or by the 
employers of the Author.
Printed on FSC accredited paper.
 
For my sons, 
whose future depends 
on ESG working
 
“Goodness is the only investment that never fails.”
Henry David Thoreau
“The ESG industry: An industry of words, abbreviations, 
promises, guidelines, conferences, interpretations, definitions. 
Steps, nevertheless. Important in so many ways.”
Sasha Beslik, financial sustainability expert
With expert interviews, regional and sector focuses; this 
handbook covers the latest developments, insights, and 
forecasts for anyone interested in investments that consider 
Environmental, Social and Governance criteria.
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CONTENTS
Foreword by Catherine Howarth, ShareAction xi
Introduction 1
One acronym too many? 1
Resolving (or not) the great terminology debate 11
Acorn to a tree: a brief history of ESG 14
Where we are now 24
Five minutes with Bruce Davis, Abundance Investment 26
Chapter 1: Investing for the ‘E’ – Environmental 31
What assets count as environmentally good? 35
Five minutes with Lisa Beauvilain, Impax Asset Management 38
What counts as environmentally ‘bad’? 48
The unburnable assets theory – ‘keep it in the ground’ 54
Five minutes with Mark Campanale, Carbon Tracker 54
Chapter 2: Investing for the ‘S’ – Social 73
What is social investing? 75
Why is social impact hard to measure? 77
Pragmatism versus perfection 93
Interview with the Baillie Gifford Global Stewardship Team 94
Chapter 3: Investing for the ‘G’ – Governance 109
What is governance? 111
Interview with Keith Davies, Federated Hermes Limited 122
Chapter 4: ‘P’ is for Performance 159
Does ESG lead to better performance? 162
Is there an ESG bubble? 164
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Top performing ESG funds and trusts over the last year/last five years 168
Does ESG cost more? 172
Chapter 5: ESG Strategies 179
Engagement versus divestment 181
Passive versus active asset management in ESG 192
Debt versus equity 194
Funds, trusts, ETFs, direct equities, bonds – which is best for ESG? 198
Five minutes with Amy Clarke, Tribe Impact Capital 204
Chapter 6: Regulations and Ratings 209
Regulation and voluntary initiatives 211
Summary of developments in regulations, milestones and standards in 
the last year 216
Other key initiatives 219
Are ESG ratings reliable? 221
Five minutes with Ingrid Holmes, Green Finance Institute 230
Chapter 7: Grassroots and People Power 241
ESG in pensions, ISAs and crowdfunds 246
A non-industry perspective, from Tony Burdon, Make My Money Matter 249
The importance of shareholder voting 253
Five minutes with Richard Wilson, interactive investor 254
Chapter 8: What Does the Future Hold for ESG and Its Investors? 259
Will all investing become ESG? 261
The limitations of ESG 263
Five minutes with Yan Swiderski, Global Returns Project 264
The battle for hearts and minds 268
Glossary 273
Further Resources and Information 275
Partners 279
Notes 285
Index 289
About the Editor 296
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FOREWORD 
by Cather ine Howar th , 
chief execut ive of ShareAct ion
Capitalism needs to change its ways. On this point there is 
widespread if not universal consensus. The rise and rise of 
ESG is the investment industry’s response to a crisis in modern 
capitalism. But ESG investing is itself highly controversial, increasingly 
so as its successes – and its claims – become ever more pronounced.
Becky O’Connor is an astute and critical observer of the ESG world, yet 
her personal convictions and commitment to responsible investment 
also shine through and will lend confidence to readers who care deeply 
about the uses and abuses to which their financial assets are exposed.
This book is a timely guide to the complex and rapidly evolving terrain 
that is the ESG landscape. Readers are skilfully led through the maze of 
acronyms and competing theories that underpin different schools of 
action and investor impact. The text is peppered with highly readable 
and informative interviews with leading players and influencers 
in the field.
ESG investing has exploded in recent years. The debates that rage 
are far from settled. Policy makers and regulators have rapidly moved 
in on the act in ways that are designed to determine investor and 
corporate behaviours but also seem likely to produce a range of 
unintended consequences. The frenzy of change and activity looks set 
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to continue, not least as new and incumbent commercial actors jostle 
for ESG market share. This essential handbook will no doubt need 
updating before too long. But by capturing with great accuracy and 
insight the state of ESG in the early 2020s, this handbook will provide 
a timeless record of a fascinating moment where ESG appeared to 
reign dominant in our capital markets.
Catherine Howarth
London, 2022
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INTRODUCTION
One acronym too many?
it’s impossible to begin a book with an acronym in the title without 
an immediate definition. Although it is tempting to assume that 
everyone in the world now knows ‘ESG’ stands for Environmental, 
Social and Governance factors in the context of investment decision 
making (this book was written only a few months after the COP26 
climate summit in Glasgow), in fact it is not yet universally understood. 
Mention it at the dinner table with friends and you may be met with 
blank stares and, if lucky, some educated guesswork.
In a 2019 survey of private investors by Research in Finance, only a 
little over a tenth of respondents could correctly write out ESG in full.1 
This figure could be slightly higher now, given the surge in interest in 
sustainability and the role of global finance in saving the planet in just 
three years. But it would be optimistic to imagine it much higher.
Despite this lack of knowledge of what ESG means, the amount of 
professionally managed portfolios that had integratedkey elements 
of ESG assessments exceeded $17.5 trillion globally by 2020, according 
to the OECD.2
The Financial Conduct Authority (FCA), the UK’s own regulator, is 
now heavily focused on ESG, publishing its own definition in December 
2021. The following excerpt from the report highlights the complexity 
of the terms involved:
“ESG and sustainability are hugely important. But terms such as 
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‘climate’, ‘environment’, ‘sustainable’ and ‘ESG’ are often used 
loosely across the financial sector; and sometimes interchangeably.
“There is of course an overlap between the terms. Climate change 
is a core focus of environmental work, which is itself one pillar of 
ESG. And ESG captures the key dimensions of wider sustainability; 
that is, how people, planet, prosperity and purpose come together 
to help enable ‘the needs of the present [to be met] without 
compromising the ability of future generations to meet their own 
needs’ (see the United Nations Our Common Future report). 
Values are embedded in ESG. But importantly, the scope of ESG is 
much wider.”3
There is plenty of evidence that the concept, if not the acronym itself, 
is beginning to seep into the mainstream. The recent rise in popularity 
of investing with the planet and people in mind – as well as profit – is 
indisputable.
As the FCA’s own Financial Lives Survey 2020 found, almost two thirds 
of participants reported that they worry about the state of the world 
and feel personally responsible for making a difference. Four out of 
five respondents consider environmental issues important and believe 
that businesses have a wider responsibility than simply to make a profit.
Two years ago, assets under management (AUM) in sustainable and 
ethical funds available in the UK stood at £103 billion. This had more 
than doubled to £280bn by October 2021, according to the Good 
Investment Review conducted by Square Mile Research’s 3D Investing 
and Good With Money.4 The number of funds qualifying for inclusion 
in this universe rose from 264 to 348 between October 2019 and 2021 
– a race for supply to meet growing demand.
According to the UK Investment Association, the majority (77%) of 
industry assets are now subject to ‘stewardship’ activity. The integration 
of ESG factors in investment decision making was present in 49% of 
investment approaches in 2020, up from 37% in 2019.5
Among younger, millennial investors, there is evidence of a stronger 
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desire to invest according to values than is found among the general 
UK investor population. Two-thirds of Generation Z and millennial 
investors consider a company’s goals, mission and purpose prior 
to investing, according to Equiniti.6 This will become increasingly 
relevant to the industry as this principled cohort matures, earns bigger 
salaries, possibly inherits money from baby boomer parents and then 
is faced with a choice over how to invest their growing wealth.
But in thinking about ESG as a generational concern, the danger is it 
becomes boxed in the category of ‘woke political agenda’. Larry Fink, 
chief executive and chairman of BlackRock, made an effort to get it 
out of this box in his 2022 CEO letter. He writes:
“Stakeholder capitalism is not about politics. It is not a social or 
ideological agenda. It is not ‘woke.’ It is capitalism, driven by 
mutually beneficial relationships between you and the employees, 
customers, suppliers, and communities your company relies on to 
prosper. This is the power of capitalism.”7
Figure 1: Proportion of assets under management by 
responsible investment category (2020)
Stewardship ESG
integration
Exclusions Sustainability impact
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: investment Association, iMS report, 2021
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The Investment Association (IA) found that assets within sustainability-
focused strategies have almost doubled from 1.4% of industry AUM 
to 2.6%. Impact investing remains more niche, with a small number 
of firms managing impact investment strategies, representing 0.5% 
of industry assets. Assets subject to exclusions also increased in 2020, 
reaching 25% of AUM, up from 18% in 2019.8
But it is important to consider how these approaches can overlap 
and be practised at the same time by fund managers. To date, the 
industry has tended to view these approaches as distinct and discrete 
disciplines. In reality, even if a fund has one primary approach – impact, 
for instance – by definition it also practises exclusion (equating to 
negative screening and an ethical approach) and considers material 
risks (which are a component of ESG).
Increasingly, funds are applying a range of different approaches to 
this area. As John Fleetwood, founder of 3D Investing, highlights in 
the latest review, a number of multi-asset ESG funds have launched in 
recent months. He says: 
“these are ‘all-in-one’ solutions, with each fund in the range being 
managed according to a given risk profile. These largely adopt a 
strategy of an element of ethical screening combined with an ESG 
tilt and a minority allocation to sustainable solutions.”
As ESG investment grows in popularity, choice and maturity, the 
debate over what to call it – a term that accurately reflects what it 
is, doesn’t allow for a loosening of the reins or inspire greenwash, 
and is still usable to lay people – rages on. The term ‘ESG’ arguably 
sits better within the investment industry that coined it than in the 
sphere of normal investors looking for somewhere to put their ISAs. 
More accessible terms such as ‘ethical’, ‘sustainable’, ‘responsible’ or 
‘green’ may be more fit for wider use, even if they come with technical 
differences to investment practitioners. Acronyms inherently sound 
quite technical and scientific. But they are also useful at shortening 
what is quite a broad and sophisticated range of considerations and 
approaches – in this case into just three letters.
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Every year millions more dollars are pumped into sustainable 
investments and the industry of analysts, NGOs and regulators 
that supports them. The race to become top dogs in the ESG asset 
management and ratings fields, to produce the finest metrics and to 
be the loudest voice, has pressed the buttons of those with keen radars 
for spin and bluster, who believe the whole exercise is no more than 
overzealous marketing of something that shouldn’t really be in the 
field of marketing.
Others take the view that if ESG is your selling point and you are good 
at it, then why not tell everyone? How else are you going to attract the 
money that wants to invest in quality ESG, unless you communicate it? 
But there’s saying and there’s doing, and the gap between the two is an 
area of increasing preoccupation for those trying to work out where to 
put their – or their customers’ – money, as well as for regulators.
Beyond r i sk and re turn: what ESG is – and i sn’t
ESG stands for Environmental, Social and Governance factors, in 
the context of investment decision making, usually (but not always) 
among asset managers – the companies charged with managing the 
money we all invest, one way or another, in our pensions and ISAs. It 
is also a way of measuring investee companies against these criteria – 
you can’t practise ESG as an investor if the companies you have the 
choice of investing in do not also reflect those values. So a company 
that wants to attract investors who have demanding ESG requirements 
has to have a good story to tell when it comes to ESG.
The approach is essentially applying a measuring tool for impacts not 
traditionally measured by the risk/return investment equation. It is a 
holistic attempt to quantify the sometimes elusive and often nebulous 
effects of a business activity. It’s a way to identify, measure and compare 
the positive and negative actions and externalities associated withan 
investment, whether that’s a company or an investment product, like 
a fund or an ETF.
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Because it is a measuring tool, how it is measured, not just what it is 
measuring, is particularly important. This issue has become the subject 
of significant debate. Ratings systems for ESG are discussed in Chapter 6.
It is sometimes described as a third factor in investment decision-
making – leading to the three Rs of ‘Risk, Return and Responsibility’. 
However, perhaps a more accurate way of thinking about it is that it 
permeates and fundamentally changes the risk and return calculations, 
particularly over the long term. This book examines the argument that 
ESG sits firmly within the category of risk management of investment 
firms and at investee companies in Chapter 3.
Figure 2: Risk, return and responsibility
responsibility
return
return
responsibility
risk
risk
From this...
to this...
The Three Rs
ESG versus e th ical
It’s tempting to use the terms ‘sustainable’ or ‘ethical’ instead of ‘ESG’. 
As a former financial journalist, I know that a technical acronym that 
has to be spelled out and takes up 36 characters is going to be met with 
an eye roll – it is not a good use of finite space. The problem is that the 
investment industry, when confronted with ‘ethical’ or ‘sustainable’ 
as bywords for ESG, eyerolls back. To the industry, ‘ethical’ refers to 
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the negative screening of harmful activities and precedes ESG as an 
investment approach. The oldest ethical investment funds, which came 
to being before the immediacy of the climate crisis was well known, 
removed things like tobacco, arms manufacture and animal testing – 
activities that caused obvious harm to people or animals. Among the 
first modern funds of this type, the Pax fund was launched in 1971.
An ESG approach is not the same as this negative-screening, traditional 
ethical approach, even if the underlying concept of doing more good 
than harm is similar (although depending on your point of view, your 
drive to include ESG factors in your own investment decisions may 
be entirely ethically motivated). So ESG can be ethically driven, but 
it doesn’t have to be. It could just as easily be about minimising risk 
and protecting financial value over the long term. Whereas ethical 
investing does take into account ESG factors to varying degrees, 
depending on the specific ethical issues being addressed.
ESG versus CSR
CSR, or Corporate Social Responsibility (the third acronym to be 
mentioned in the introduction alone!) refers to companies giving 
money to charity, allowing employees to volunteer for good causes 
and generally trying to do some social good alongside their day-to-day 
business. It’s worth mentioning here as it’s a more established, 
charitable part of usually large businesses and has been confused with 
ESG in the past. However, they are not the same, as they try to do good 
in different ways and function in different parts of a business.
Traditionally, a company’s CSR efforts have had very little to do with 
its ESG standards relating to operations, supply chains, HR and so on. 
CSR has been a standalone area of the business, which (very cynically) 
stands accused of merely making bosses feel good about themselves 
to little genuine net positive effect, but (more favourably) can have a 
huge social impact if applied at scale throughout the business. Alex 
Edmans, professor of finance at London Business School, describes it 
critically thus:
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“In the early Catholic Church, the wealthy could commit any 
number of sins and buy an ‘indulgence’, or earn one through good 
works, that absolved them from punishment. That’s similar to how 
CSR is often practiced. A company can undertake CSR without 
changing its core business; instead, it involves activities siloed in a 
CSR department, such as charitable contributions, done to offset 
the harm created by its core business.”9
ESG is not CSR, and CSR activities – while good and laudable – should 
not sit in the basket of company activities to be measured for their 
ESG value. ESG lives traditionally in asset management, in the ‘where 
to invest’ decision-making function of a big investor. In order to be 
investible from an ESG perspective, it also has to live in every part of 
a company that wants to attract ESG-motivated shareholders, not just 
within the CSR section of an annual report.
ESG and the UN Sus ta inable Development 
Goals (SDGs)
The big, global problems the world faces were carefully laid out in 
the 17 UN SDGs (another pesky acronym that stands for Sustainable 
Development Goals) back in 2017, and cover a range of focus areas.
The SDGs came to be used as a framework by which to measure 
sustainable development and have also been adopted by the investment 
fund industry as a way to steer itself on a better course.
The usefulness of the SDGs as a way to rate the ESG quotient of 
an investment is limited, however, as it may be possible to crowbar 
a company’s activities into one of the goals and claim victory, while 
ignoring or even doing harm relating to some of the other goals.
There are accusations of SDG-washing, and an asset manager’s 
assessment of how well they measure up against each SDG must 
sometimes be read with a pinch of salt.
Over time, it has become apparent that asset management is struggling 
to find ways to address some of the goals that lend themselves less 
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well to profit-seeking solutions. According to Matthew Ayres of Ethical 
Screening, the UK-based consultancy, not all of the goals have proven 
genuinely investible to date. The table below shows which of the goals 
have attracted the most investment – and which goals asset managers 
have struggled to meet.
Figure 3: Which goals are investible? All goal hits across ethical 
screening database
200
180
160
140
120
100
80
60
40
20
0
200
180
160
140
120
100
80
60
40
20
0
3
GOOD 
HEALTH AND 
WELL-BEING
4
QUALITY
EDUCATION
2
ZERO
HUNGER
1
NO 
POVERTY
5
GENDER 
EQUALITY
6
CLEAN 
WATER AND 
SANITATION
7 
AFFORDABLE 
AND CLEAN 
ENERGY
8
DECENT 
WORK AND 
ECONOMIC 
GROWTH
9
INDUSTRY, 
INNOVATION 
AND INFRA-
STRUCTURE
12
RESPONSIBLE
CONSUMPTION 
AND 
PRODUCTION
13
CLIMATE 
ACTION
11
SUSTAINABLE
CITIES AND 
COMMUNITIES
10
REDUCED
INEQUALITIES
14
LIFE BELOW 
WATER
15
LIFE ON 
LAND
16
PEACE, 
JUSTICE AND 
STRONG 
INSTITUTIONS
17
PARTNERSHIPS 
FOR THE 
GOALS
Source: Ethical Screening.
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So, while using the SDGs as a way to frame and measure ESG progress 
can be useful, there is no official link between the two.
ESG versus green
The term ‘green’ is often used as shorthand for sustainable investments 
because it is simple and consumer friendly. But green only really 
refers to the ‘E’ part of ESG – it’s possible to have a green fund that 
doesn’t have any particular mandate or official duty towards good 
social outcomes or governance standards. You’d hope an investment 
that purported to be green would also meet these other standards, but 
whether it does or not is not necessarily set in stone if its focus is only 
on the planet.
Because it deals with social and governance standards too, ESG 
encompasses more than ‘green’ investing does. However, the urgency 
of climate change, COP26 and the need to control emissions and 
global temperature rises means that the green or environmental 
part of ESG has dominated column inches and arguably investors’ 
preoccupations recently. This urgent need to act, alongside the 
argument that environmental investment options are more mature 
and numerous than socially beneficial investment options, has given 
rise to a greater number of investment products in this area, as well as 
far greater focus on the ‘E’.
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Figure 4: The spectrum of privatecapital
Source: impact investing institute
Resolving (or not) the great 
terminology debate
This book is intended as a practical guide to understanding the 
rapidly evolving field of ESG investing. While the terminology and 
its application has caused difficulties and does seem at times a little 
too open to interpretation, it’s important to start by establishing the 
understanding of ESG that this book is working on.
While ESG attempts to make a part of the investment process that 
might otherwise be viewed as ‘moral overreach’ scientific, it’s hard to 
avoid taking a philosophical position on the definition. This goes back 
to what ESG was intended to do – rather than what it might have come 
to mean relative to other terms and in light of what the investment 
industry has done to it.
ESG may not exactly be the same as ethical investing, and yet there is 
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overlap because both involve some degree of value judgment. ESG may 
be about measuring and internalising externalities, but the questions 
around whether we should care about measuring those externalities 
in the first place, and which to care about most, are moral ones.
It may also be worth considering the spirit of the term when deciding 
what it means or how well any investment is doing. Clearly, those who 
coined it felt that achieving all three elements within an investment 
was to some degree possible. Focusing solely on one element while 
giving little or no regard to the other parts of the equation would 
seem against this spirit of a general raising of standards and efforts to 
deal with these areas of potential harm or benefit holistically.
A shared understanding that investing involves the consideration of 
externalities – the benefits and harms to stakeholders other than 
shareholders – of a business or investment product, is essential. 
Unfortunately, such a shared understanding of the spirit of ESG is 
not a given. There are plenty of shareholders who do not believe that 
consideration of ESG is helpful either to financial returns or to the 
wider stakeholders: the planet, people, employees and customers 
whose interests ESG aims to represent.
For the purposes of this book, and at the risk of raising hackles, I use ESG 
as a catch-all term for investments that to some degree and in different 
ways – with different emphases between the three themes – consider 
environmental, social and governance factors. That is, a very broad 
and literal definition of ESG, which also includes negative-screening 
(traditional ethical), sustainability (focused on environmental but also 
social and governance), responsible stewardship and positive impact.
This is in the spirit of how the term was originally coined, rather 
than what it might have come to mean and some of the negative 
connotations it now has (for instance, the criticism that it has given 
rise to greenwash). Some of the problems the ESG approach has 
caused will also be covered.
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The beginnings of an ESG backlash
Within the industry and among investors interested in this rapidly 
evolving area, ESG is causing divisions. Why has something which 
seems so innocuous become controversial? Accusations abound that 
the practice of merely ‘considering’ ESG factors is too vague, too 
forgiving, too easy to apply to investments that wouldn’t match any 
fair-minded person’s understanding of good for the planet or people. 
Even industry insiders tell how the term has been used and abused 
as a label that suggests an investment fund or trust is better than 
it really is; that there isn’t enough transparency over data to make 
genuinely meaningful ESG ratings. In an excoriating essay published 
last year, Tariq Fancy, former head of sustainability at BlackRock Asset 
Management, which moves almost $10trn around the global economy 
every day,10 characterised the way ESG investment is being practised 
as follows: “denial, loose half-measures, or overly rosy forecasts lulls 
us into a false sense of security, eventually prolonging and worsening 
the crisis.”11
His words, a reflection of his experience at BlackRock, provided an 
opportunity for soul-searching within the industry. Unfortunately, 
they also provided ballast to those who view ESG as a distracting 
sideshow or simply a giant hoodwink among marketing departments 
that undermines the whole effort.
In January 2022 Terry Smith, the fund manager, blamed the distraction 
of corporate purpose work for Unilever’s decline in value over the year. 
“A company which feels it has to define the purpose of Hellmann’s 
mayonnaise has in our view clearly lost the plot”, he said in his annual 
letter to investors.
It may be true that there is room for wasteful investments as part of an 
ESG agenda. As Alex Edmans, professor of finance at London Business 
School, says in his book Grow The Pie, “A source of wasteful investment 
is supporting social causes that either are unrelated to a company’s 
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comparative advantage or create distraction from the core business”; 
however this does not necessarily have to unravel the whole endeavour.
ESG has its detractors on both sides – among the fundamentally cynical 
and those absolutely committed to environmental and social causes. 
As a result of some arguably misusing the term to overstate their case, 
discussing ESG has become almost shameful in some quarters of the 
values-based investment industry, particularly among those who favour 
positive-impact, solutions-based investment strategies. There is a view 
that ESG is far too wishy-washy and forgiving – its original purpose now 
diluted and worse, manipulated, to sugarcoat the status quo. Some 
have now seen so much misuse and misinterpretation of ESG that 
the negative connotations of the term have superseded any positive 
intentions it once had, to the extent that anything with the label 
should now actively be avoided by anyone wanting their investments 
to do genuine good.
And so ESG has become a dirty term among some positive impact 
purists and has been placed right at the very heart of why ‘greenwash’ 
– the misleading marketing of investments that do not help the 
environment as ‘green’ – has become a risk to the entire enterprise, 
which could cause a wholesale lack of confidence in the effort to think 
beyond risk and return.
Acorn to a tree: a brief history of ESG
We now look back to a world before the term ‘ESG’ was coined, to 
around the turn of the century, when investment decisions had two 
main considerations: risk and return. At that point, there was such a 
thing as ‘ethical’ investing, but this was concerned with screening out 
harmful activities from an investment portfolio or fund, rather than 
assessing the entire investment universe against a whole set of factors.
Society on the whole now understands humanity’s responsibility for 
climate change. Having lived through a global pandemic that has 
demonstrated the interconnectedness of all things to a horrifying 
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extent, we also understand how individual actions can influence the 
whole of global society. Now we are at this point, it is hard to appreciate 
how far we have come.
In 1896 a scientist, Svante Arrhenius, first identified the effect that 
carbon dioxide levels could have on the atmosphere. In 1958, precise 
measurements of carbon dioxide confirmed its steady atmospheric 
increase. The science is far from new, despite it taking more than a 
century for humanity to act collectively.
However, the course of the fossil fuels industry was by this point set. 
With the growth of modern capitalism over subsequent decades 
powered by oil, coal and gas, the science of the consequences of 
emissions took a back seat, behind the driver of economic growth.
The ethical investment industry began in earnest during the 1970s, a 
time when fossil fuel production was soaring, but its focus was noton 
fossil fuels at that time. Instead, the first modern ethical funds focused 
on social factors, such as the exclusion of arms manufacturers and 
other socially harmful businesses, including tobacco.
In 1991 UKSIF was founded as the ‘UK Social Investment Forum’, before 
it became the UK Sustainable Investment and Finance Association.
In 2001 the FTSE4Good Index was launched by the FTSE company. 
It was the first time an equity index had attempted to use transparent 
metrics to incentivise sustainability practices. It was met with 
scepticism, according to its 20th anniversary special report, and was 
labelled a “silly index”. The focus remained on social rather than 
environmental good.12
The term ESG was first formally coined in the 2004 report ‘The 
materiality of environmental, social and corporate governance issues 
to equity pricing’.13 It was the first time environmental factors had 
been formally considered as part of a specific investment approach.
A turning point for the widespread acceptability of the concept came 
in 2006, with the establishment of the UN Principles for Responsible 
Investing. The PRI added a third metric – responsibility – to the 
T H E E S G I N V E S T I N G H A N D B O O K
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existing dimensions of risk and return. At this point the focus was on 
expanding recognition of responsible investment as a concept.
In 2009 the Climate Bonds Initiative was established, “to foster the use 
of long-term debt to finance a rapid, global transition to low-carbon 
economy”. Carbon Tracker, another think tank, was founded in the 
same year. A shift in thinking about how capital flows could influence 
climate change was gathering shape and momentum.
In 2015 the UN launched its 2030 agenda, which included the launch 
of the 17 Sustainable Development Goals, or SDGs. In the same year 
came the Paris Agreement, a legally binding treaty negotiated at the 
Conference of the Parties 21 (COP21) in Paris, which was adopted by 
196 Parties and entered into force on 4 November 2016.
Since 2016 the growth of ESG has been almost exponential.
Back in 2016/17 there were 201 funds and trusts with some kind of 
ethical or sustainable mandate available in the UK, according to the 
Good Investment Review. The assets under management were worth 
£87bn. In the most recent review, there were 348 funds and assets 
under management worth £280bn – more than three times the value 
of the sustainable funds universe five years ago.
Expectat ions versus real i t y
The appeal of ESG as a concept has arguably grown faster than the 
universe of investments available to ESG investment fans. The result has 
been more demand for ESG investments than supply of bona fide ESG 
investment opportunities can keep up with. One reason that ESG has 
suffered a backlash at times is that it has given rise to disappointment, 
and the demand/supply imbalance is partly behind this.
You can picture the scene: the well-meaning ISA investor sits down 
to her laptop, having been inspired by something she saw on the TV 
about making her pension green. She finds an option labelled climate-
friendly and is poised to move across a small inheritance when she 
decides to take a look at the holdings and, to her horror, finds an oil 
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i n t r o d u C t i o n
company in the top ten. How is this possible? She doesn’t want to invest 
– to her, investing in oil is as bad as investing in arms manufacture or 
tobacco. As someone trying to do her bit for the planet, it does not 
seem like the right place to put her money. Yet it has an ESG label. 
She feels betrayed by the finance industry, annoyed that she wasted so 
much time doing research only to end up back at square one and left 
none the wiser as to where she should invest her pension.
Understanding the ESG investment movement as a process might 
help here. The investment industry reflects the world around us. Oil 
and other fossil fuels have dominated that world for decades. They are 
the engine of the global economy.
There are some other reasons why ESG-based funds might still invest 
in some of the bad stuff. The ‘just transition’ is an important concept 
here, too – it’s the idea that you can’t just pull all the cash out of the 
oil industry and leave the millions of people globally – including some 
very poor people in developing countries working in that industry – 
high and dry.
Another reason is that if one investor company – which may now be 
fully signed up to ESG – sells shares in an oil company that it has 
held for decades, another investor company – which may be less 
enlightened from an ESG perspective – will just buy those shares. The 
company and the shares still exist, but with a shareholder who cares 
less about ESG outcomes.
However, if the former shareholder company had kept the shares, 
they could have ‘engaged’ with the oil company on ESG issues. 
Engagement is yet another diffuse term, but it’s worth defining here. 
At its best, it means agitating for changes to reduce carbon intensity 
and increase the production of renewable energy by voting against 
or for resolutions at shareholder meetings and threatening to divest 
(or actually, conspicuously divesting) from a company to make a 
principled stand against something. Engagement and divestment 
strategies are discussed in Chapter 5.
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The pol i t i cs of ESG: Greta, COP26, cu l ture wars , 
pol icymakers and regulators
“We should always remember that free markets are a means to 
an end. They would defeat their object if by their output they did 
more damage to the quality of life through pollution than the 
well-being they achieve by the production of goods and services.”
Margaret Thatcher, speech to the UN, 1989
“We are far more united and have far more in common with each 
other than things that divide us.”
Jo Cox, Member of Parliament,
In all the focus on the minutiae of correct labels and whose ESG 
investment strategy is best, it can sometimes help to step back and 
remember the big picture.
Back in 1989 Margaret Thatcher recognised the dangerous threat 
posed by climate change to the environment: “It is life itself – human 
life, the innumerable species of our planet – that we wantonly destroy. 
It is life itself that we must battle to preserve.”
In the 21st century, our flag bearers for the cause of saving the planet 
– and life on Earth as we know it – are Greta Thunberg and David 
Attenborough, but they are supported by countless others.
Whereas as recently as 2016, environmentalists were the subject of 
jokes about knitting yoghurts, cast to one corner as Swampy-like ‘eco 
nuts’ and hippies, now their cause, which (the penny has dropped) 
is the collective cause of human survival, dominates political and 
corporate thinking.
But that’s just in the developed world. In parts of the world further 
behind on the development curve but with high aspirations towards 
GDP growth and economic improvement, prioritising the environment 
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i n t r o d u C t i o n
is seen as a luxury preoccupation of developed nations. “How can 
anyone expect that developing countries make promises about 
phasing out coal and fossil fuel subsidies? Developing countries still 
have to deal with their poverty reduction agenda,” India’s environment 
minister, Bhupender Yadav, said as COP26 drew to a close. Such a 
view is not universal among the whole of the developing world. Those 
already feeling the worst effects of climate change – low-lying nations 
in the Indian and Pacific Oceans and parts of Africa – were desperate 
in their mission to emphasise the impact of climate change effects 
on the already poor. “It’s the people who have contributed least to 
this crisis who have continued to suffer the most”, said one African 
climate activist on the fringes of the global summit in Glasgow in 
November 2021.
Global geopolitics is turbulent, and nowhere are the ramifications of 
this more apparent than in climate change policy,which threatens 
the entire fossil fuel-based foundations of some countries, such as 
Russia and Saudi Arabia and reignites centuries-old power imbalances 
among others.
At the time of writing, Russia has invaded Ukraine, and there are 
warnings about European energy security and further price increases 
for gas on the front pages. The dangers of decades-long energy policies 
that have allowed a few countries to dominate supply of the energy we 
depend on for modern life are clear and present.
Yet at this time of political and economic sensitivity, perspectives on 
the issue of climate policy (and by extension, in the sphere of ESG 
investment from the political left and right), whether in government, 
on social media or even within families, feel divergent. The question 
of what is the ‘right’ course of action has never felt harder to resolve.
The issues within Environmental, Social and Governance investing 
are vulnerable to polarisation. ESG investment was to a large degree 
born out of the climate campaign movement. This movement has 
traditionally been viewed as left-wing. 
But there are also shades of traditional right-wing, conservative values 
T H E E S G I N V E S T I N G H A N D B O O K
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in the climate fight. In particular, the preservation of nature and 
respect for the environment seem to transcend partisanship.
Despite shades of left and right, environmentalism continues to defy 
political ownership, which is helpful when it comes to agreeing policies. 
What is also helpful is that sustainability policies legitimately represent 
business opportunities – the new ‘green industrial revolution’ to which 
UK Prime Minister Boris Johnson has referred. So implementing 
them without fierce contrarian lobbying from business groups has 
been possible. As part of its ‘Race to Zero: driving the UK’s sustainable 
future’ work, the Confederation of British Industries has suggested 
that 240,000 green jobs could be created by 2030 across the UK 
and suggests that the UK could generate £8bn in revenue through 
investing in hydrogen electrolyser production.
Never before have policy, regulation and business combined on the 
side of urgent environmental action. For investors interested in ESG, 
the political and commercial backdrop in the UK and Europe – if not 
globally – has arguably never looked so favourable.
Widespread and mainstream support for climate action in the last two 
or three years has largely marginalised dissenting voices, which had 
previously questioned the science around whether climate change is 
happening, whether it is man-made and whether there is any point 
trying to do anything about it. Debate remains over the ‘how’ of 
managing it, if no longer the ‘what’ and the ‘why’. Should the focus 
be more on climate adaptation, accepting it’s now too late to change 
the course of global temperature rises? Or should we remain focused 
on limiting the damage while we still can?
It’s in this discussion over how we tackle climate change that there 
has been a degree of backlash against ESG. In truth, a range of 
approaches are likely to come into play, rather than any one strategy 
being the ‘right’ one. Questioning of the overall ESG approach 
among those who see it as diluted and too forgiving has in some cases 
moved into the space of outright rejection. This appears to amount 
to a refusal to accept some of the compromises and inconsistencies 
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i n t r o d u C t i o n
inherent in making progress in an imperfect, resource-dependent 
world; compromises and inconsistencies that are apparent with an 
ESG approach but are arguably also present with a positive impact 
approach, albeit less directly.
The problematic nature of fossil fuel dependency – even in the 
production of renewable energy or semi-conductors – is rarely 
addressed openly, argues Ed Conway, economics editor at Sky. He 
alludes to the ironic dependence of renewable energy on fossil fuels: 
“That’s right” he says in The Times, “wind turbines are made, in part, 
from oil. Solar panels are made using coal.14 The same goes, by the 
way, for the brains of all electronic devices, since computer chips 
begin their life in exactly the same way as most solar panels. Those 
smartphones upon which environmentalists tweet their disgust 
about plans to build a coking coalmine in Cumbria are made with 
coking coal.
He continues:
“That so few people are aware of this comes back to a deeper truth. 
Our understanding of how products are made, of the materials 
that go into them and the processes necessary to transform those 
materials, is depressingly shallow. Truth is, we rely on a marvellous, 
mysterious cosmos of products, without which civilisation as we 
know it would disintegrate. Carbon fibre production is a thing 
of wonder; silicon chip manufacture reads like a science fiction 
story. Yet these supply chains are also more often than not reliant 
on processes that emit carbon. If we are serious about eliminating 
emissions, we also need to get serious about understanding from 
where those emissions actually come.”
Some of the difficulties of unravelling supply chains, both from their 
dependence on fossil fuels and arguably the social equivalent – cheap 
labour – are addressed in the sector focuses at the end of Chapters 
1, 2, 3 and 5.
Some believe that ESG doesn’t go far enough, and others feel that it 
never can. For those who don’t believe the ESG-ing of mainstream 
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investments is sufficient, the global crisis is now so critical that only 
positive impact investments focused on solutions will do. According 
to this view, we don’t have time to engage with the old-world fossil fuel 
companies and they must be left behind completely. But in building 
an approach that seeks to be ‘good only’, we may also be in danger of 
creating another fallacy – that positive impact is 100% perfect.
Another part of the discussion on the usefulness of ESG is whether 
good investing should just do this stuff anyway; whether ESG is just a 
marketing exercise designed to make asset managers look better and 
allowing them to justify higher fees and overstate the level of decision 
making and action that’s really happening; whether measuring and 
reporting on ESG has become so unreasonably demanding of firms 
that they’ve lost focus on what’s important; or whether only larger, 
well-capitalised businesses can possibly look good in this area, because 
they are the only businesses that have the resources to cope with all 
the extra reporting.
At the extreme, the ‘it’s all marketing’ accusation could run into 
accusations of mis-selling of ESG at some point – if that gap between 
what ESG investments deliver and what they say they are going to 
deliver becomes too wide. In the UK, the Financial Conduct Authority 
has now become involved, setting a taxonomy for what counts as ‘green’ 
and developing a green labelling system as part of an important set of 
preventative steps to avert an ESG mis-selling scandal arising.
Critics of ESG also point to an ESG ‘bubble’, or at least the risk of a 
bubble. They highlight evidence that – in terms of performance – it 
may be downhill from here, as the profitability of companies ranking 
highly for ESG catches up with their price valuations.15
When you consider the big picture: catastrophic climate change within 
the lifetimes of our children; the astonishingly rapid destruction of 
nature and habitats, including human; economic migration on a huge 
scale; significant levels of inequality, human rights abuses and war, the 
question of what genuine ESG investment should be doing feels – and 
is – urgent.
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i n t r o d u C t i o n
But ESG investors aren’t alone in trying to save the world; other civil 
society organisations, the Government, regulators and charities all 
have a role too. The question of where the flow of capital is directed 
is a massively important piece of the puzzle, as outlined in Figure 5.
Figure5: The pieces of the puzzle
Private 
equity 
investors
Asset
managers Companies
individual
investors regulators trade
bodies
Governments industry-led
initiatives
Charities 
and nGos
Global
organisations Academics Banks
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Where we are now
What should good ESG look l ike?
There are many ways to skin a cat, so the inelegant saying goes, and 
there is also more than one interpretation of what ‘good ESG’ is.
While there is broad agreement that the investment industry can and 
should give credence to ESG, firms that have different specialisms 
and different approaches in a competitive market will naturally arrive 
at different viewpoints and employ various methodologies. Some 
tub-thumping seems inevitable (‘my ESG is better than your ESG’) in 
an investment industry where the intellectual style of a fund manager 
is considered a unique selling point and in a market that consists 
of literally thousands of funds, investment companies and ETFs for 
investors to choose from, which has grown in size to £9.4trn, according 
to the Investment Association.16
‘Net zero’ (whereby companies remove as much or more carbon as they 
are responsible for emitting) is a good example of this. Current UK 
goals are for the economy to reach 50% net zero by 2030 and 100% by 
2050. Many companies, including asset managers managing trillions 
in pension assets, are grappling with what their own net zero targets 
should look like. Should pension funds aim to be net zero by 2050? Or 
is this not punchy enough? How about 2030, or even right now?
We discuss investing for the ‘E’ of ESG, in Chapter 1.
Another hot topic of debate is around ESG strategies: what is the best 
way to reduce carbon emissions by the biggest polluters, in which 
many of us indirectly or directly invest?
Is it to continue to hold the shares of fossil fuel companies, or indeed 
any company with a poor ESG record on a big issue, and use the power 
of shareholders to force change? To threaten to oust executives of 
polluting companies who mismanage climate risk, vote against the 
board on shareholder resolutions and regularly question companies 
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i n t r o d u C t i o n
about what they are doing on X, Y or Z issues? This strategy, known as 
‘engagement’, is particularly popular with those institutions that have 
big legacy holdings in polluting companies and now feel that the best 
tactic they can employ is to encourage change from the inside.
Alternatively, could a better way be to divest, that is, sell shares in fossil 
fuels companies? This is what Bill McKibben, the environmentalist 
founder of 350.org and now Third Impact, first argued the case 
for in a 2013 Rolling Stone magazine interview, following activism he 
had led among students to pressure universities to divest from fossil 
fuels.17 The argument was powerfully made. Divestment not only 
reduces the flow of capital to fossil fuel companies, it also sends a 
signal. On the downside, if a responsible investor sells shares, the risk 
is that a less scrupulous one simply buys them, and all that has been 
achieved is that the company has been given a free pass to continue 
polluting for longer.
The amount now committed for divestment globally has reached 
$40trn across 1500 institutions, according to the Divestment Database.18 
Among the large UK-household-name investment firms committing to 
divest completely from coal – and partially from some other fossil fuels 
– are: Allianz Group, Axa, Aviva, Banco Santander, Blackrock, BMO, 
Lloyd’s of London, Prudential, RSA Insurance and Scottish Widows.
The diplomatic view of the ‘engagement versus divestment’ debate 
could be that a combination of both strategies is the most effective 
route. We discuss strategies: engagement versus divestment, as well as 
debt versus equity and which could be more effective, in Chapter 5.
The questions of what should ESG be and what should it do – the 
size of the ESG piece in the much larger global puzzle of actors and 
actions – feel like productive questions to be continually asking.
T H E E S G I N V E S T I N G H A N D B O O K
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Five minutes wi th Bruce Davis , 
co- founder of Abundance Inves tment
What do you th ink o f ESG?
The investment philosophy that underpins ESG 
has many parents, which makes it hard to 
generalise about its value alongside other 
schools of investment thought. At one 
extreme, it is about trying to change the 
way companies behave, to recognise that 
their license to operate requires greater 
social and ethical responsibility on their 
part as ‘citizens’ of the economy. At 
another, it is simply an extension of the 
marketing 101 of investment management, 
namely that it is a route to some form of 
alpha which beats the market because its 
criteria reduce downside risk (specifically the risk 
of bad corporate actors or companies falling out of 
favour with society or the market).
The tipping point of environmental consciousness, crystalised by the 
declaration of a climate emergency, has further muddied the waters as 
it has swept away many of the detailed ethical concerns and criteria for 
the immediate and overwhelming need to decarbonise our economies. 
However, as the movement for a ‘just transition’ shows, green does not 
always mean good for society and there are many shades of green or 
climate investment which are open to criticism for being causative 
of wider social and economic issues (which themselves could be 
handbrakes on the transition) or out and out greenwash – prolonging 
the profitability and value of otherwise ‘stranded assets’.
In summary, ESG is not very useful as a category term, there is no such 
one thing as ‘ESG investing’, instead it is the start of an often complex 
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i n t r o d u C t i o n
and nuanced enquiry into the purpose of particular investment funds 
or companies and whether they live up to promises they make.
Are there examples o f sec tors or companies tha t 
combine a l l th ree?
All green investments should look to the three pillars of ESG to 
make sure their contribution towards fighting the climate emergency 
doesn’t come at a cost elsewhere in society. If this feels like a higher 
bar for green investments that is only because those who are still 
willing to invest in ‘non-ESG’ companies are willing to forgo values 
for profit. It is arguably the role of regulation to punish or constrain 
those companies who socialise the costs of their activities to maximise 
profits for their shareholders or owners.
Since 2020 we have seen more investments in ‘transition’ sectors (such as 
food production and transport), which have all had elements of the three 
pillars for investors to consider, but it is rarely a cut and dried equation – 
investors must weigh up the relative benefits and costs in terms of impact 
just as they consider the relative financial returns and risks involved.
How can we make ESG more demanding and more 
credib le? i s i t th rough regula t ion and pol icy?
Very simple, regulation, regulation, regulation. Companies won’t 
create standards out of thin air and relying on markets to ‘discipline’ 
companies only works if all investors are signed up to the same 
standards and requirements, otherwise there will always be investors 
who look for alpha ‘wheat’ amongst the market ‘chaff’.
The issue for regulation is that it is still operating very much via a 
rear-view mirror. The early problems of ESG greenwash have been 
overtaken by a more complex set of issues for investors. Rather than 
past performance and reporting, scrutiny needs to be applied to the 
‘forward statements’ of companies and funds and assessment made 
whether they are credible individually or collectively. If, for example, 
T H E E S G I N V E S T I N G H A N D B O O K
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a company like Shell makes claims for future carbon neutrality whilst 
maintaining its presence in fossil fuel extraction, what impact does 
that have on theeconomy as a whole to decarbonise? Can an airport 
credibly make claims to be ‘carbon neutral’ at a future date when the 
transport it facilitates does not have a credible plan or technology to 
decarbonise within a meaningful timeframe for our carbon budget?
Ultimately therefore it will be government policy which forces 
companies to comply – or go bust – and the time we have before 
that particular approach is applied is fast arriving. In other words, 
the investment risk of maintaining an optimistic view of the ability 
of technology and innovation to solve our problems could well mean 
that soon ESG will be the only option for investors.
does greenwash undermine the whole idea of 
sus ta inable inves t ing?
The potential for greenwash is always present and requires constant 
vigilance. It doesn’t undermine the idea of sustainable investing, but 
it should make you cautious when funds or companies make claims 
about being sustainable in the absence of clear regulatory guidance 
or sanction on the issue.
i s ESG real ly jus t e th ics by another name?
At its purest, ESG is an attempt to bring ethical considerations to 
business decisions and investments. In reality it falls somewhere 
between beliefs or values about building a better world and a 
philosophy of pragmatism or laissez faire utilitarianism.
When we talk about ethical investing we are talking about people 
who are conscious that their money is not a neutral actor in 
society, it has consequences and the investment of money carries 
greater responsibility than just the stewardship and conservation of 
individual wealth.
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i n t r o d u C t i o n
Money is the most powerful tool for collective action ever invented, 
but it has become subject to competing ethical beliefs about the 
value of money which mean that it is now divided between those 
who are altruistic about what their money can achieve for society as a 
whole, and those who believe that the invisible hand of self-interest is 
sufficient moral guidance.
ESG is an attempt to bring those altruistic values to bear on companies 
who otherwise would see themselves purely as stewards of capital 
rather than a body with a wider purpose and value to society. As with 
all ethical frameworks it is only as good as the means by which you can 
measure or assess the impact of ‘purpose’ often in the absence of a 
counterfactual.
How can inves tors te l l i f someth ing i s t ru ly sus ta inable?
There are increasingly better metrics to assess the sustainability of an 
investment in terms of climate or another measure (such as those 
within the Sustainable Development Goals). However, no single 
investment will provide a magic bullet of sustainability, but investors 
instead should look at their portfolio as a whole and try to make 
sure their money is on the right side of history when it comes to the 
reckoning on existential issues such as the climate emergency or 
chronic inequality.
What does good/bad ESG look l i ke?
Bad ESG is about prolonging the value of assets which would otherwise 
be either stranded or worthless (or illegal), good ESG is about building 
a better world that doesn’t simply bake in the problems of the past 
inside a green-tinged wrapper. ●
T H E E S G I N V E S T I N G H A N D B O O K
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3 1
C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
i nves t ing 
for the ‘E ’ – 
Env i ronmenta l
C
H
A
P
TE
R
 1
T H E E S G I N V E S T I N G H A N D B O O K
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3 3
“I’m done with fossil fuels. They’re done. They’re just done.”
Jim Cramer, US stock market guru
t here have been far more column inches, reports, funds and 
attention in the investment world in general on the E of ESG, 
compared to the S and the G.
Arguably, this is with good reason. There are also good reasons to argue 
that investments that protect the planet also by default have positive 
benefits for society: it is, after all, humanity’s future on the planet 
that we are preserving, rather than the planet itself (which will surely 
survive, albeit in a less hospitable form, should global temperatures 
continue to rise).
From a financial perspective, there is a compelling argument that there 
is risk to investors from wealth being tied up in fossil fuels, because the 
weight of regulatory and policy measures now concentrated on net 
zero targets for businesses means the value of their shareholdings in 
coal, oil and gas is at risk of serious and sudden decline. The theory 
of unburnable carbon – which hypothesises that, given regulations 
designed to limit global temperature rises, much of the unrealised 
value of fossil fuel companies will have to be left in the ground (and 
that this will lead to falling asset values for coal, oil and gas companies), 
places a big question mark over continuing to hold these companies 
in investment portfolios. That is, unless their net zero transition paths 
materialise as planned. So another route, as discussed in the section on 
engagement in Chapter 5, is for investors in high-emission companies 
to help make those transition plans happen.
T H E E S G I N V E S T I N G H A N D B O O K
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Nevertheless, an understanding of the ‘unburnable carbon’ theory is 
essential for investors seriously considering their stance on fossil fuels. 
With that in mind, we interview Mark Campanale, founder of Carbon 
Tracker, at the end of this chapter.
Investing for the planet is about more than simply substituting 
renewable energy for fossil fuels. Although that is a big part of the 
solution picture, so are pollution problems and their effect on 
health, plastics alternatives, protecting the oceans through improved 
waste management as well as emission reduction, sustainable food 
production, protecting biodiversity, sustainable building and transport, 
water scarcity, extreme weather events and strategies for managing 
overpopulation.
Biodiversity and nature are likely to take an increasing share of 
attention among environmentally-focused investors. “Nature and 
climate are inextricably linked. A continuing loss of nature negatively 
affects a country’s ability to mitigate the impacts of climate change 
(e.g., mangroves provide protection from storm surges) and absorb 
and store carbon (e.g., in peatlands and forests). Furthermore, 
climate change contributes to the loss and shifting of habitats and 
species (e.g., through increased wildfires or loss of coral reefs),” reads 
the WWF and Ninety One summary of biodiversity’s importance to 
investors in the Climate and Nature Sovereign Index.1
For now though, the primary political focus is on achieving net zero 
emissions globally by 2050. Different countries have different paths to 
this goal; some, it should be noted, do not have plans. The UK has a 
goal to cut emissions by 68% by 2030 compared to levels in 1990 and 
78% by 2035 – the next steps along the net zero road.
Net zero by 2050 is considered a fairly realistic target for the world. 
Unfortunately, it would still result in temperature rises, but would 
give the world what the International Energy Agency describes as an 
‘even chance’ of limiting these rises to 1.5°C of warming beyond pre-
industrial temperature levels.2
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
Minimising the social consequences of the transition to a global 
economy based on renewable energy rather than fossil fuels is a big 
area of focus too, recognising that for economies dependent on fossil 
fuels, particularly in the developing world, a sudden collapse of these 
industries would result in job losses and poverty (the ‘just transition’).
What assets count as 
environmental ly good?
The list of policies and themes that sit within the category of 
‘environmental’ is long.
Figure 6 is taken from the Fund EcoMarket website and includes no 
less than 27 policies, issues and themes that fund managers focused on 
this area may consider:Figure 6: Environmental policies, issues and themes
■		 Sustainability policy
■		 Environmental policy
■	 		 	Climate change / greenhouse gas 
emissions policy 
■	 		 	Coal, oil &/or gas majors excluded
■		 Fracking and tar sands excluded
■		 Arctic drilling exclusion
■		 Fossil fuel reserves exclusion
■	 		 	limits exposure to carbon intensive 
industries 
■	 		 	Environmental damage and pollution 
policy 
■	 		 	Favours cleaner, greener companies
■		 invests in clean energy/renewables
■		 Plastics policy/ reviewing plastics
■		 deforestation / palm oil policy
■	 		 	unsustainable / illegal deforestation 
exclusion policy 
■	 		 	Sustainable transport policy or theme 
■	 		 	resource efficiency policy or theme
■		 Sustainability theme or focus
■	 		 	Clean/renewable energy theme or 
focus 
■	 		 	nuclear exclusion policy
■		 Single resource theme or focus
■	 		 	Avoids genetically modified seeds/
crop production 
■	 		 	Biodiversity policy
■		 Waste Management policy or theme
■		 Energy efficiency theme
■	 		 	require net zero action plan from all/
most companies 
■	 		 	Eu Sustainable Finance taxonomy 
holdings 5-25% of assets 
■	 		 	Eu Sustainable Finance taxonomy 
holdings >25% of assets
Environmental
Source: Fund EcoMarket, fundecomarket.co.uk 
T H E E S G I N V E S T I N G H A N D B O O K
3 6
Investors may want the most black and white version of environmen-
tal good and bad as possible to begin with. Thanks to the rapid devel-
opment of the global environmental solutions sector as a whole, it is 
now possible to construct an investment portfolio that meets risk and 
return objectives but remains fully on the side of renewable energy 
solutions.
Of course, it’s not necessarily as simple as dividing investments up 
into environmentally ‘good’ and ‘bad’. There are many arguments 
that you can ultimately do more environmental good by being 
an activist shareholder in a company that is on the wrong side of 
the transition to clean and green than by ignoring the fossil fuels 
industry altogether.
But in order to avoid muddying the waters, it’s perhaps best to stick with 
those business sectors where there is clear and measurable reduction 
of CO2 emissions, or reduction of other environmental harm through 
companies’ main revenue-generating activities.
Investments that are focused on climate change mitigation and also 
adaptation are in the ‘environmental good’ basket, as are (generally 
speaking) waste management companies, pollution control companies, 
sustainable food production and packaging, water treatment and 
management and businesses that use sustainable materials.
Leafscore, a US-based sustainability website, recently published its top 
10 companies worldwide for climate change mitigation:
1. Alphabet – owner of Google – for plans to be carbon free by 2030.
2. Beyond Meat – for reduction in land use and CO2 emissions 
compared to meaty alternatives.
3. HP – for increasing the amount of recycled plastics in its printers 
and other equipment.
4. Unilever – for being an industry leader in reusable and 
recyclable packaging.
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
5. Johnson & Johnson – for climate activism, committing to 
keeping microbeads out of products and supporting climate 
mitigation efforts in 26 cities that should directly affect up to 60 
million people.
6. Tesla – for producing more than one million electric cars, powering 
plants with renewable energy, providing disaster relief financial 
assistance for regions experiencing hurricanes and forest fires 
throughout 2018 and 2019 and delivering clean power solutions to 
critical infrastructure sites through solar panels.
7. Microsoft – for plans to shift to 100% renewable energy by 2025 
and become carbon negative by 2030.
8. Apple – for winning a Greenpeace award and working on expanding 
its global recycling programmes to reuse valuable components in 
older products.
9. Nike – for operating on 100% renewable energy and for its 
recycling programme, Nike Grind, where used footwear and 
surplus manufacturing materials are transformed into new shoes 
and apparel, running tracks, basketball courts and outdoor 
play equipment.
10. Hasbro – for its use of sustainable materials and 
recycling programme.
All of the above are large, listed companies. So it feels important to point 
out at this point that there is much, if not greater, potential to meet 
net zero through investments in the small and medium-sized company 
world, too, and even through private rather than public markets.
T H E E S G I N V E S T I N G H A N D B O O K
3 8
Five minutes wi th L i sa Beauvi la in , 
d i rec tor a t Impax Asset Management
How is impax’s approach 
to env i ronmenta l inves t ing 
di f fe ren t?
From the very beginning there was 
a realisation that we would have to 
establish and continuously develop 
a taxonomy for what environmental 
solutions look like and what they are: 
this has been developed for more than 
twenty years. The Impax Environmental 
Markets taxonomy has four main areas of 
environmental solutions:
1. New energy – which means energy efficiency, 
and also renewable energy. 
2. Water. Then three areas within water:
• Infrastructure of water
• Treatment/recycling of water/cleaning up of water 
• Companies providing clean water to our taps, the water utilities
3. Waste management/recycling and the circular economy.
4. Sustainable food – this can include things like innovative packaging 
to help reduce food waste.
This is our framework or taxonomy and for the last 20 years we’ve 
been focused on companies with at least 20% of revenue relating to 
these environmental solutions. There has been a sense of rigour from 
the beginning to do this in a very detailed manner.
We have always had someone who has been responsible for 
3 9
C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
maintaining and developing the universe of companies. This is not a 
small undertaking.
When we started we had identified 250 companies that had more than 
50% of revenues from environmental solutions.
Recently we have developed our environmental markets classification 
further to emphasise the importance of clean and efficient transport 
and the role played by data in smart environment solutions. To 
date we have identified more than 2,000 companies that have more 
than 20% of revenues from environmental solutions. This growth is 
a result of a combination of new companies coming to the market 
and us identifying more companies, but also developing a better 
understanding of what constitutes environmental solutions over time 
and expanding the environmental themes within the taxonomy.
Has the growth of companies pu t pressure on the 20% 
min imum?
Not really. For many companies the percentage is much higher. 20% is 
just a threshold where we start becoming interested – we think that is 
the right point to start looking at these companies and to keep them on 
our radar – enough revenue for operations to start moving the needle.
It is also usually the fastest growing part of the business, so the 
percentage tends to rise rapidly.
20% is not a particularly high level. Across the portfolios the typical 
percentage is much higher at 55% to 80%.
Has much of the growth been in the las t few years?
Growth has been relatively even, but there has been a real surge in 
companies coming to the market. We have noticed a massive surge in 
IPOs in the last couple of years for instance.
For example, in the Nordic market there has been a surge in the last 
18 months – many of these companies have been launched in the 
T H E E S G I N V E S T I N G H A N D B O O K
4 0
space of environmental solutions. It is a recognition that these are the 
critical societal challenges that need to be met. A lot of companies are 
looking to reduce energy use, materials use and their CO2 emissions 
–here are the well-positioned environmental solution-providing 
companies that can do that.
do you have your own measure for env i ronmenta l 
impact?
In terms of listed equities’ managers, we were the first to do detailed 
environmental impact measurement back in 2015.
When we started, we began with an open mind – what could be done 
– what measures could we use?
For example, we had been reporting environmental revenue 
percentages to clients. This was helpful, but we wanted more detailed 
measurement and reporting. If anyone could do it, it was us, because 
we are so focused on environmental markets investing and had a lot of 
experience of environmental classification systems.
We started with a completely open book – with our small and mid cap 
specialists strategy – in terms of assessment. We had all companies in a 
spreadsheet. We started assessing what the companies were reporting 
themselves. That was a surprise. We realised that a lot of companies 
that were pureplay environmental solution providers were measuring 
and reporting a good deal of environmental impact data related to 
their products and services, although they may not yet have reported 
extensively on more general ESG data.
So we established the most relevant metrics. It was clear that carbon 
emissions and carbon avoidance were very relevant measures for most 
environmental companies.
Also renewable energy generation – not counting energy used in 
a company’s own operations but only what is sold and generated 
for others to consume, as well as metrics around water saving and 
treatment and measurements for recovering and recycling waste.
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
Those were the factors that crystallised in our analysis as being the 
most relevant impact metrics and where we already had good data 
from the companies themselves. That was the starting point.
We developed methodologies for measuring what we could find from 
the companies themselves and then to support our analysis with 
information from academic and industry research.
We have always been seeking to confirm our assumptions and estimates 
with the companies.
From the beginning, we have had an external assurance partner, which 
has been important to verify data and the methodology of our work. 
There is a lack of standards around measuring impact, so this external 
assurance is important and useful.
i s there a divergence in the qual i t y o f repor t ing 
bet ween large and smal l companies or i s the 
qual i t y more down to whether they are ‘pureplay ’ 
env i ronmenta l so lu t ions companies?
There is definitely less data around broader ESG KPIs and metrics 
from smaller companies.
An often-cited problem is the lack of resource at smaller companies 
to report on metrics. But at the same time, those that are really 
pureplay will have done analysis maybe for regulatory purposes but 
also for understanding their own products and so have done extensive 
work of impact measurement, often with external experts, despite 
being smaller.
That was a surprise for us, to find a lot of really interesting data and 
details early on with smaller companies around their environmental 
performance and impact. Although generally, for smaller companies, 
there is less ESG data and reporting available.
T H E E S G I N V E S T I N G H A N D B O O K
4 2
Are cur ren t o f f ic ia l measurement s tandards f lawed in 
your v iew?
Sometimes it’s in the practical implementation of things where 
measurement falls down. You can look at some guidance and it’s not 
necessarily completely aligned with what’s happening in practice. 
The question is how do you make standards that are practical and 
applicable when you are sitting with guidance in front of you.
do you use the term ESG? i s i t use fu l to you?
It’s a difficult term. We do use it. I always think it should be followed 
with the term process or analysis because that’s what it is. ESG 
followed by ‘investing’ is not very helpful, but ESG analysis is. The way 
we think about it is there is a ‘what’ and a ‘how’. For us, the ‘what’ is 
very important. What is the company actually doing; what activity and 
what are its products and services? That’s part of what we assess. That’s 
the first step and is the basis for our Impax Environmental Markets 
universe, for example.
The second step is the ‘how’. How are companies within environmental 
markets operating? How are their governance structures and 
oversight functions? How well are they managing their most material 
sustainability risks? The ‘how’ is analysed through our proprietary 
company-level ESG-analysis. Companies need to have sufficient ESG 
quality in order to be part of our investable universe of companies, or 
‘A-list’. Both the ‘what’ and the ‘how’ are key. We have a third element 
around engagement. Through engagement, we encourage companies 
to further improve their structures, processes and operations and 
become even better companies and investments.
i s there pressure to take in to account soc ia l and 
governance as wel l as env i ronmenta l fac tors?
It’s important to establish that the ‘E’ is focused on the ‘what’ (for 
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
environmental universe inclusion) but the ‘how’ (company-level ESG 
analysis) is all three.
We view governance as really critical, as the building block for 
companies, providing oversight and accountability and avoiding 
conflicts of interest. The ‘G’ is often overlooked. When we read 
about companies having real issues, it almost always comes back to 
the ‘G’. We look for outliers – recognising that the ‘G’ is informed 
through the home market codes, rules and regulations. Unfortunately, 
companies are following their home market rules and regulations 
almost blindly. We advocate for a global best practice approach for 
corporate governance.
That’s a big focus area for us on a company level.
The importance of ‘S’ has been particularly highlighted by the 
pandemic. We view human capital and corporate DE&I management 
as material and systemic issues for all companies in our ESG analysis. 
We place great value in analysing those, to understand the quality and 
character of companies. They are important signals.
does tha t make i t harder to go in to new marke ts?
It could do. Where the ‘G’ is very immature, we find almost no 
environmental solution companies. That’s in frontier markets. The 
environmental companies tend not to exist.
i s the ‘G ’ in t r ins ic to meet ing env i ronmenta l goals?
Academic research, when it looks at governance, often struggles to 
find links with good governance and higher shareholder returns. But 
at the same time, when things go wrong, it goes back to issues in the 
oversight functions and governance structures. It’s risk management 
and quality assessment and you want to ensure there are no blatant 
issues that could disrupt your company. It is about understanding the 
companies that might get into trouble.
T H E E S G I N V E S T I N G H A N D B O O K
4 4
What do you th ink are the nex t b ig developments in 
env i ronmenta l asse ts in the nex t f i ve years?
Electrification of everything. Electrification of transport but not 
just cars – air and marine travel. But what’s key there is that it is all 
supported by clean energy because it’s meaningless if it is supported 
by carbon-intensive generation of electricity.
It needs to be supported by stronger storage and battery capabilities. 
For the harder-to-mitigate industries such as steel and cement, where 
negative environmental impact is elevated, the issues of getting to net 
zero CO2 emissions are going to be key. For hydrogen to be clean, 
you need abundant renewable energy. Opportunities all depend on 
renewable energy. The transition is not as far along when it comes 
to nature-relatedopportunities. We don’t have all the answers for 
what that looks like. We have to be able to price and value nature and 
biodiversity and the systems we get from nature. At the same time, we 
need to protect it. We cannot go on at this rate of biodiversity loss, it 
will adversely affect the economy, climate and our health. That’s a very 
different environmental issue, highly localised and hard to measure 
and value – a lot of people are thinking about it. But that’s definitely 
the next phase.
i s the development o f e lec t r i f i ca t ion , renewable energy 
and hydrogen g lobal?
It’s a completely global shift. But there may be slightly different 
motivations in different countries in terms of CO2 emissions 
reductions and push towards a sustainable transition, e.g., climate 
policy, industrial policy, energy security or even a need to reduce 
local air pollution. China, for example, has a very ambitious 
industrial policy to have a high percentage of future GDP coming 
from environmental technologies, but also needs to address the air 
pollution crisis in its large cities, stemming from coal-fired power and 
fossil fuel burning transport.
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
Are g lobal e f for t s l i ke CoP he lp ing?
That’s the only way. The problem is global and so the response must be 
too. That’s a challenge in the face of increasing trade protectionism. 
That’s making the collaborations harder, but that is the only way.
How is the uK doing re la t ive to o ther count r ies?
There are some really interesting things the UK is doing. It was the first 
country to put in place a Climate Change Act in 2008, setting 5-year 
carbon budgets all the way to 2050 – so there was clear vision early 
on. It is one of the countries generating the most renewable energy 
in the world, 43% of UK’s electricity was generated from renewable 
sources in 2020. That shouldn’t be forgotten. The sector roadmaps 
and the net zero strategy published before COP26 are good templates 
for other countries to consider.
Are there any red f lags tha t cou ld throw of f progress in 
env i ronmenta l marke ts?
Governments will need to work closely with the private sector. That 
needs to become a stronger relationship. Governments everywhere 
in the world need to get the incentives right if we are going to reach 
the goals. We can’t continue to incentivise the most carbon-intense 
activities. Instead setting a price on carbon emissions, globally, is an 
important and much needed signal.
Wil l t rans i t ion work?
Yes, but the transition road is not linear and is not easy or even 
across all activities and sectors and usually requires a clear catalyst, 
through either a technological breakthrough or policy intervention. 
The energy transition away from fossil fuels to renewable energy 
has been swift, following the dramatic fall in the price of renewable 
energy equipment, which was triggered by the initially very generous 
T H E E S G I N V E S T I N G H A N D B O O K
4 6
feed-in-tariff regimes for renewable energy generation in Europe, 
effectively jump-starting a global industry and production of renewable 
energy equipment. The scale of this brought equipment prices down 
dramatically, allowing for renewable energy to rapidly compete with 
traditional energy forms, on equivalent price levels, without subsidies. 
The electrification of transport is not a dissimilar sequence of events, 
combined with progress in battery technology. However, there are hard-
to-abate sectors that are important for our daily lives and economy, such 
as agriculture, steel, cement, shipping etc. Some of these sectors may 
never reach fully net zero carbon emissions or a total transition, but 
will require significant policy support, coordination and technology 
investment to move far enough on their sectoral decarbonisation 
pathways, in order to allow for an overall economy-wide alignment to 
the Paris climate agreement targets.
Why i s ‘S ’ no t as wel l captured?
Mainly because of a lack of data. If we had full information, I think the 
‘S’ would be a bigger driver of performance. That’s also an opportunity. 
Who can best understand human capital? It’s one area where markets 
are completely inefficient. We cannot value it.
But an important development in this regard was that the leading global 
ESG-data standard-setting organisations are merging into one – the ISSB. 
Their mission is to get sustainability data out of glossy reports, where at 
worst they are sometimes more like marketing materials, into annual 
reports, and into the back of annual reports where they are part of the 
financials and become part of how companies are valued. That’s a really 
critical thing. Today, human capital is an accounting cost, but if you start 
analysing it, well, it’s most definitely an asset, perhaps the most valuable 
asset for most companies, though it’s not currently valued as such.
Getting ESG standards into accounting standards is going to be interesting.
Without this integration, the economy and businesses will never 
accurately price and value the risks and opportunities stemming from 
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
material sustainability issues, whether they are, for example, climate-, 
human capital- or nature-related services.
Are there examples where companies demons t ra te the 
soc ia l impact o f the i r env i ronmenta l impact?
Yes. Pollution control especially has a clear link to social outcomes. 
Lots of environmental solutions in the pollution prevention space also 
have positive health and social outcomes. ●
the top eight holdings in impax Environmental Markets trust are:
• PtC inc (united States): developer of software solutions that are 
deployed in industrial design and manufacturing.
• Generac Holdings (united States): supplier of standby and portable 
generators for the residential, commercial and industrial markets.
• Koninklijke dSM nv (the netherlands): adding nutritional ingredients 
into animal feed and personal care.
• Clean Harbors (united States): market leader in hazardous 
waste disposal.
• indraprastha Gas ltd (india): key distributor of natural gas to the 
automotive industry.
• American Water Works (united States): the largest listed water 
utility in America.
• Aalberts nv (the netherlands): develops and sells water technologies.
• xinyi Solar Holdings ltd (China): the most profitable solar glass 
supplier in China.
For more information visit impaxenvironmentalmarkets.co.uk.
T H E E S G I N V E S T I N G H A N D B O O K
4 8
What counts as environmental ly 
‘bad’?
As anything investible that works to improve any of the environmental 
areas is included in the ‘good’ section above, to perhaps state the 
obvious by now, anything that contributes to any of the problem areas 
conversely counts as bad.
Activities that produce CO2 emissions are public enemy number one, 
given the Herculean challenge the world now faces in keeping global 
temperature rises within 1.5°C of warming above pre-industrial levels.
Indeed Faith Birol, executive director of the International Energy 
Agency, declared in May 2021 that in order to meet the global goals, 
there can be no new investment in oil, coal or gas. “The pathway to net 
zero is narrow but still achievable. If we want to reach net zero by 2050 
we do not need any more investments in new oil, gas and coal projects.”
Several of the world’s biggest CO2 emitters are listed in Figure 7:
Figure 7: The world’s biggest CO2 emitters, ranked by 
cumulative emissions
1. Saudi Aramco 1938–2018 
2. Chevron 1912–2018 
3. ExxonMobil 1884–2018 
4. Gazprom 1989–2018 
5. BP 1913–2018 
6. Shell&BG 1892–2018 
7. national iranian 1928–2018 
8. Coalindia 1973–2018 
9. Pemex 1938–2018 
10. ConocoPhillips 1924–2018 
11. Peabody 1945–2018 
12. PetroChina 1988–2018 
13.Pd venezuela 1960–2018 
14. total 1932–2018 
15. Abudhabi 1962–2018 
16. Kuwait 1946–2018 
17. iraqnoC 1960–2018 
18. Sonatrach 1959–2018 
19. BHP 1955–2018 
20. ConSol/Cnx 1864–2018 
21. PetroBras 1954–2018 
24. Eni 1950–2018 
31. rWE 1965–2018 
33. Equinor 1971–2018 
39. repsol&talisman 1964–2018
Source: Climate Accountability institute, climateaccountability.org/carbonmajors_
dataset2020.html
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
Biodivers i t y loss
Again, there is far more to environmental harm than CO2 emissions. 
Intensive land use and associated destruction of habitats, mining of 
natural resources, methane production from livestock, the disposal 
of electronic and plastic waste, chemical and other forms of water 
pollution all count as environmentally harmful activities. The rate 
of decline of biodiversity represents an additional existential threat 
beyond the rise of CO2 emissions in the atmosphere.
This is increasingly recognised in the ESG investment world.
In November 2021 HSBC, Euronext and Iceberg Data Lab launched 
the Euronext ESG Biodiversity Screened Index to provide a benchmark 
for investors as to which stocks to include in their portfolios and which 
to exclude, based on how a company’s overall activities impact nature.
Figure 8: Top ten sectors of the Euronext ESG Biodiversity Index 
Full line insurance
6.19%
Apparel retailers
3.44%Specialty Chemicals
3.53% Production technology
Equipment
12.49%telecommunications 
Services
3.67%
Cosmetics
4.10%
Software 
6.75%Personal 
Products
4.61%
Chemicals: diversified
5.79%
Banks 
6.27%
Source: Euronext.com
T H E E S G I N V E S T I N G H A N D B O O K
5 0
Figure 9: Euronext® ESG Biodiversity Screened Eurozone 50
Company 
ASMl HoldinG l
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nl 
dE
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dE 
Fr
nl
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Fr
dE 
dE
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Fr 
dE
nl
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Fr 
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Fr
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Sector (ICB) 
Production technology Equipment 
Chemicals: diversified 
Software 
Personal Products 
Cosmetics 
Full line insurance 
Specialty Chemicals 
Consumer digital Services 
transaction Processing Services 
Medical Supplies 
Semiconductors 
telecommunications Services 
delivery Services 
Publishing 
Apparel retailers 
Footwear 
Banks 
Full line insurance 
Clothing and Accessories 
Banks 
distillers and vintners 
Brewers 
radio and tv Broadcasters 
Food Products 
Software
Banks
Apparel retailers
reinsurance
Computer Services
Food Products 
Food retailers and Wholesalers 
real Estate Holding and development 
Building Materials: other 
Semiconductors 
Computer Services 
investment Services 
Publishing 
Banks 
Machinery: industrial 
Multi-utilities 
Full line insurance 
Brewers 
Property and Casualty insurance 
Casino and Gambling 
telecommunications Services 
Professional Business Support Services 
Specialty Chemicals 
telecommunications Services 
Paper 
Health Care Services
Weight (%)
12.486
5.794
5.328
4.611
4.100
3.261
2.782 
2.781
2.694
2.307
2.192
2.152
2.143
2.125
2.082
2.078
2.045 
2.020
1.948
1.830 
1.717
1.702
1.666 
1.429 
1.424 
1.400
1.356
1.352
1.333
1.330 
1.215 
1.155 
1.141 
1.118 
1.100 
1.077 
1.024 
0.992 
0.974 
0.963
0.909
0.851
0.848 
0.835 
0.816 
0.810
0.746
0.703
0.669
0.588
Source: Euronext.com
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C H A P t E r 1 : i n v E S t i n G F o r t H E ‘ E ’ – E n v i r o n M E n t A l
Despite the launch of this index and the Taskforce for Nature-Related 
Financial Disclosures, biodiversity impact measurement of investments 
remains a relatively immature area and is likely to develop significantly 
in the coming months as frameworks for net zero become more 
established and attention can turn to other environmental challenges 
for companies and investors.
Case s tudy: heal thcare sec tor and 
environmental harms beyond CO2
Below are some of the ways in which healthcare companies’ activities 
can lead to environmental harms including, but not limited to, energy 
consumption and Co2 emissions – and some of the measures they can 
take to improve them – taken from the CdC group toolkit for ESG investors, 
available at toolkit.cdcgroup.com/sector-profiles/healthcare.
Ai r emiss ions
Environmental problem
the bulk of air pollution from healthcare operations stems from on-site power 
generation (particulate matter and GHGs), and ozone depleting substances 
from large HvAC systems. Particularly where older or poorly maintained 
equipment is used.
Solut ion
Air emissions control and monitoring measures should be implemented by 
companies in accordance with the applicable regulations and standards.
T H E E S G I N V E S T I N G H A N D B O O K
5 2
Waste management
Problem
Effective waste management is material to the healthcare sector as 
operations often generate large volumes of hazardous and non-hazardous 
waste. Given the nature of the sector, there are often stringent regulations 
in place for the safe disposal of biomedical and hazardous waste and 
companies may face strict penalties if these regulations are not adhered to.
Such wastes include (but are not limited to) infectious, pathological, needles 
and sharps, chemical, pharmaceutical, genotoxic and radioactive.
Solut ion
Extend the due diligence scope to waste-disposal vendors the company 
engages with to check that they are adequately licensed and practising 
according to local laws and regulations – particularly in terms of waste 
segregation, handling, treatment and disposal. other typical non-hazardous 
waste streams include electronic waste, paper, food and general waste. A 
good way to manage waste is to begin tracking all waste categories by 
volume over a certain period. By gaining a better understanding of waste 
generation, the company can set targets to reduce waste volumes, purchase 
and disposal costs, and storage times.
the company should engage with all stakeholders who may be affected 
by its waste, through provision of adequate awareness raising and training, 
PPE and building secure waste storage areas. the company should also 
conduct regular monitoring and testing of waste management and disposal 
methods to ensure that it meets regulations.
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Water/wastewater management
Problem
Water consumption is significant for healthcare facilities and may pose 
material risks to the company if facilities are located in water-stressed 
regions. it is important to have good data-management systems in place 
to track water-consumption levels and identify hotspots. Effective water 
management can lead to reducing, reusing and recycling water in order to 
improve the company’s water footprint and mitigate against future water-
scarcity threats.
Solut ion
typical water-efficiency practices may range from simple changes 
such as fixing leaks and installing low-flow faucets to larger capital 
expenditure optimisations, such as recirculating treated water from Sewage 
treatment Plants.
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Theunburnable assets theor y – 
‘keep i t in the ground’
Five minutes wi th Mark Campanale , 
founder and execut ive chair of Carbon 
Tracker (carbontracker.org) , the 
independent f inanc ia l th ink tank
How have th ings changed s ince you 
se t up Carbon tracker? do you fee l 
opt imis t ic?
When we were founded, the ideas of climate 
risk and unburnable fossil fuel reserves 
held by listed companies, systemic risk 
and ‘stranded assets’ were not well 
established. So we were the first to write 
about them from the lens of financial 
markets and financial regulators.
Today, these risks are well known, we have 
initiatives such as the TCFD and GFANZ, 
and there is article after article on the idea 
that the global financial sector has reached a 
tipping point when it comes to managing climate 
risks and goals. So much has moved on.
do you th ink the energy t rans i t ion wi l l lead to the nex t 
f inanc ia l c r i s i s? 
Not necessarily. The challenge is that with some 200 years of 
industrialisation, we have deeply embedded a fossil-fuel-based 
production system (cement, steel, aviation, shipping, power, 
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transportation etc.,) into financial markets. It’s how we untangle that 
– we need to reduce emissions by 45% over the next decade – without 
causing huge financial instability. So how do bond markets and the 
banking system unravel themselves from the carbon economy without 
falling over?
So it needs some clear rules and disclosures around decarbonisation 
pathways, by which I mean asset write-downs, business transformation 
costs, re-building company balance sheets as we fund the creation of 
a low-carbon, or no-carbon, industrial system. We start with power and 
transportation and then we go further. We talk about this challenge in 
our paper located at carbontracker.org/reports/decline-and-fall.
So we know the costs will be huge – hence the concerns about a 
financial crisis – but then we also know that the fact that renewables 
and the clean energy system are now cheaper than the old fossil fuel 
system will lower the cost of energy for consumers globally and put 
more cash into people’s pockets. It will also change the terms of trade 
between countries (depending on which are the major fossil fuel 
importers and exporters) with so-far-unquantified benefits.
Are the poten t ia l f inanc ia l consequences o f remain ing 
inves ted in foss i l fue l s adequate ly unders tood? Are 
they avoidable and i f so , how?
I think so far, they’re understood at the surface level. The big unknown 
I think – from an analytical point of view – is whether the companies 
are worth more running themselves down and paying out what they 
make in the next decade in the form of higher dividends and share 
buy-backs? Or are they worth more continuing to invest the $10–25bn 
a year (Chevron, Exxon) in new production with the hope of making 
higher profits in the future? Investors are, in my view, holding on to 
the shares thinking that there will be a bounce back for the sector and 
claims of a rapid energy transition are over-made.
I was surprised to see that some newspapers are still ‘new’ to explaining 
T H E E S G I N V E S T I N G H A N D B O O K
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or raising the threat of decarbonisation to investors. If they’re writing 
late about it, then many US-based investors are late to it as well.
i s the s t randed asse ts argument as re levant now as i t 
was when i t was f i rs t pu t for ward?
Yes. It’s because the whole movement behind, for example, GFANZ 
reveals that many banks and investors are trying to figure out what ‘net 
zero’ means; how they will fund the transformation of global industry 
so as to reduce emissions by 45% and get to net zero within a decade 
or so. I sense a greater urgency now from investors to figure it out.
What are the f inanc ia l r i sks o f unburnable carbon to 
regular inves tors and pens ion scheme members? Wi l l i t 
be ordinar y people , a t the end of the day, who end up 
su f fer ing the brun t o f the f inanc ia l consequences?
It’s a good point. So far, we know that there have been considerable 
financial losses felt by shareholders in the fossil fuel system over the 
last decade. It could be that with the bumpy ride in markets as we 
move from a fossil fuel system to a renewable-based system, there will 
be periods of rising oil prices and volatility in share prices – but this 
is a phase of the transition, as opposed to signs of the market moving 
back to using fossil fuels. So is the worst over for the fossil fuel system 
and share prices; or is the worst to come?
The other day a chart came out showing new car sales, with internal 
combustion engines versus electric vehicles – it’s striking. Over three 
years from 2018, electric car sales have leapt from around 2–3% of new 
sales to more like 15% – can it go even faster and further? I think so. 
If it does, then the fossil fuel companies will face further de-rating by 
markets, to the cost of pension funds and regular investors.
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How ef fect ive was CoP26? What s t i l l needs to be done?
Well the good news is that for the first time in 25 years, countries are 
committing to phasing out coal. That’s progress. However the bad 
news is that it took 25 years to get there – and we need to move even 
faster, more urgently. Outside of the main COP discussions we had the 
launch of the Beyond Oil and Gas Alliance (BOGA) with 12 nations or 
so, to permanently retire oil and gas licences.
We need the COP to move into discussing the fossil fuel supply side – 
and maybe contemplate the new Fossil Fuel Non-Proliferation Treaty, 
as found at www.fossilfueltreaty.org.
Wil l China, india , russ ia and Saudi Arabia ever agree 
to s top foss i l fue l product ion?
OPEC is based on constraining or managing supply, so as to secure 
higher prices. So falling oil and gas and coal demand will lead to lower 
prices, which won’t be a good thing for producer nations. So some 
sort of global agreement like www.fossilfueltreaty.org offers to actually 
play into their favour.
Are there any foss i l fue l companies t rans i t ion ing wel l?
There are a few which are making the right noises – Carbon Tracker 
scores them at carbontracker.org/reports/absolute-impact-2021. The 
classic company everyone talks about is Ørsted – which used to be 
DONG Energy (Danish Oil and Natural Gas) which sold off its fossil 
fuel businesses and focused on renewables.
i s engagement a v iable s t ra tegy for ins t i tu t ional 
inves tors?
It depends to what ends. If it is to change the board so as to put in 
place a more rapid transition strategy, to constrain new investment in 
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more fossil fuels, then to cash out and pay higher dividends as they 
wind down, then yes. Engagement has a purpose. Otherwise, what else 
might engagement actually do? Companies spending 5–8% of their 
capex on renewables isn’t exactly evidence of a rapid transition.
What do inves tors need to be mos t aware of?
How the speed of the energy transition hits asset prices/
de-rates companies.
How can inves tors adapt the i r por t fo l ios?
If the transition starts now, then portfolios can be adapted. It’s really 
about getting the companies in the portfolio to shift to a low carbon 
system. It’s the companies whose business model relies on growing 
fossil fuel use – i.e., oil and gas, coal, which will be penalised and there 
is a financial case there for them to be sold, as the market moves away 
from their products. ●
Companies to look out for and what they are 
doing
The top ten renewable energy stocks to consider (listed with market cap 
at time of writing), according to online trading providerIG.com, are:
1. Tesla ($699.25bn)
2. Ørsted A/S ($209.15bn)
3. Vestas Wind Systems ($41.46bn)
4. Verbund ($31.73bn)
5. Enphase Energy Inc. ($23.19bn)
6. SolarEdge Technology ($14.69bn)
7. First Solar ($10.24bn)
8. Ormat Technologies ($3.79bn)
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9. DAQO New Energy Corp ($3.64bn)
10. Jinko Solar ($2.06bn)
104 UK companies have approved science-based targets to keep their 
emissions below 1.5°C warming levels and also committed to net zero.
The full list is available at sciencebasedtargets.org.
Some of the biggest names among the publicly-listed companies 
operating in the UK are:
• AstraZeneca
• Autotrader
• Barratt Developments
• Berkeley Group Holdings 
• Bloomsbury
• Boohoo
• BT
• Canary Wharf Group
• Capita
• Christie’s
• Coca Cola
• Compass
• Croda
• Currys
• Diageo
• GlaxoSmithKline
• Innocent Drinks
• J Sainsbury
• Kingfisher
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• Land Securities
• Network Rail
• Next
• Pearson
• Spectris
• Unilever
• United Utilities
• Vodafone
• Workspace Group 
Env i ronmenta l ly focused asse t managers :
A selection of seven of the most engaged asset managers focused on 
sustainability solutions, from John Fleetwood of Square Mile Research:
• abrdn
• Baillie Gifford
• BMO Global Asset Management
• Columbia Threadneedle
• Federated Hermes
• Stewart Investors
• WHEB Asset Management
Funds and t rus t s to look ou t for :
Four funds and trusts to consider with a sustainability focus, selected 
by Julia Dreblow, of Fund EcoMarket www.fundecomarket.co.uk:
• BMO Responsible Global Equity
• BMO Sustainable Opportunities 
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• L&G Future World Climate Change Equity Factors Index Fund
• M&G Climate Solutions Fund
How to spot greenwash
‘Greenwash’ is a big problem for the ESG investment world. Without 
trust in the authenticity of the exercise, investors will simply lose faith 
and resort to other means of making a difference.
It may have arisen largely through over-zealous marketing, but it could 
also be a deliberate attempt to mislead and mis-sell, as Keith Davies, 
chief risk and compliance officer at Federated Hermes, explains in his 
interview in Chapter 3.
It has become an annoying fact of life for ESG investors that claims 
cannot always be believed and ‘do your own research’ remains the 
order of the day. We await the full impact of new policies and regulatory 
measures to quash greenwash and you can read more about them 
in Chapter 6.
Membership of an alliance or the publication of a pledge is not 
usually enough.
As Colin Baines, of the Friends Provident Foundation, told 
Capital Monitor:
“We see a huge variance in standards from asset managers making 
similar climate commitments and claims… from good to terrible. 
As it stands, membership of these initiatives is being used by many 
to greenwash. As such, membership is not useful to asset owners as 
an indicator of taking climate change seriously.”
For now though, there are a few ways to quickly identify whether the 
marketing is overstating the facts for ESG investments.
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How to ident i f y greenwash: th ree ways
By lisa Stanley, co-founder of Good With Money
• Which companies does the fund invest in? only revealing the top 
10 holdings is not enough – the firm should detail every sector and 
company the fund invests in, and why it does, or why not. What else do 
they invest in? does the firm offer one or two ‘token’ sustainable funds 
amidst a sea of mainstream (=fossil fuel) funds or do they have proven 
depth and breadth in the sector?
• How long has the investment firm or fund manager been managing 
money in sustainable sectors? Are they truly experienced or are they 
just hitching a ride on the bandwagon?
• How engaged are they? do they regularly vote on corporate issues that 
matter to you, challenging companies and maintaining a dialogue with 
them on tricky issues, or is there little evidence of this?
ESG sector focus : proper t y/hous ing
ESG issues, opportunities to invest and risks vary by sector. Some 
sectors offer more obvious and immediate opportunities to go green 
or to have a social benefit, however this is usually the flipside of how 
responsible they are as sectors for the sustainability issues in the 
first place.
In these ‘sector focus’ sections we single out some of the key ESG 
topics in some of the biggest sectors of the global economy.
There is no more tangible, universally understood investment sector 
than property. It starts with our homes but extends to office, retail and 
industrial spaces.
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The tangibility of property, its enormous part in our everyday lives 
and concurrent ability to improve living standards, wellbeing and 
communities, as well as its very obvious impact on the environment, 
put property at the very heart of ESG. Energy use and emissions from 
property – primarily homes – are significant contributors to climate 
change. Add up the contributions of property (both residential and 
non-residential) to energy and emissions, and it makes up by far the 
biggest proportion of any sector (as Figure 10 shows).
Figure 10: Property energy use and emissions
Source: iEA
T H E E S G I N V E S T I N G H A N D B O O K
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As Keith Davies, chief risk and compliance officer for Federated 
Hermes, says:
“Real estate is at the helm of ESG, for a number of reasons: it can 
regenerate rundown areas and put in place sustainable communities, 
supporting local shops and keeping people safe. It can reduce 
living costs by providing low cost rented accommodation. It can 
turbocharge efforts to reduce carbon from buildings, which is a 
huge generator of emissions.”
There are 23 million homes in the UK. Property ownership is by far 
the greatest wealth-related aspiration of the general public. Ultimately, 
the destiny of all investment wealth is to end up in property at some 
point; to be invested in something that can be touched, experienced 
and enjoyed. Investments in companies through the stock market 
are a means, but property accumulation is the ultimate end for many 
people looking to build wealth through investing.
Env i ronmenta l impact o f proper t y
Domestic emissions are a huge issue: around 40% of UK emissions 
come from homes, according to the Committee on Climate Change.3 
The average Energy Performance Certificate (EPC) rating is D (on 
a scale A–G). While homeowners may be theoretically incentivised 
to make their own homes more energy efficient and thus save on 
their ever-increasing energy bills, often from gas central heating and 
fossil fuel-powered electricity, the reality is that the cost of installing 
alternative energy sources like air source and ground source heat 
pumps and solar thermal panels is prohibitive for most households. 
Incentives have so far had limited impact on the problematic economics 
– even with favourable renewable tariffs, homeowners generally have 
to be living somewhere they intend to stay for many years in order 
to get ‘pay back’ on their investment. Besides – around 4.5 million 
of the UK’s homes – about one fifth, are owned by private landlords, 
who have little incentive to bring the energy efficiency levels of their 
homes up to standard, because they are not paying the energy bills.
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To counter this, the UK Government has introduced minimum energy 
performance legislation for landlords. The minimum energy efficiency 
standard (MEES) allowed for rented properties is a minimum of an 
E rating on their EPC. New EPC regulations mean that from 2025, 
rented property needs to have a certificationrating of C or above.
Whether for homeowners or landlords, bringing a home up to an EPC 
rating of C or above is a tall and expensive order. Various incentive 
schemes have been introduced, but many have failed to get off the 
ground and/or been pulled soon after introduction. The ‘Green 
Deal’, which was introduced with much promise in 2012 and promised 
that bill savings would always be greater than costs incurred, ended 
ignominiously in 2015, with low uptake of the scheme.
Loft and cavity wall insulation is generally more affordable than 
domestic renewable energy and heating, but is not always possible, 
depending on the age and construction type of the property.
Non-domestic buildings do not use as much energy or produce as 
many carbon emissions, nevertheless, they are a part of the picture 
and energy performance minimum standards are also changing for 
offices, warehouses and shops.4
According to the World Green Building Council, buildings and 
construction are responsible for 39% of global carbon emissions.5 
A major shift is required in the way that buildings are constructed 
and operated to manage environmental and social impact. This 
involves re-thinking material supplies such as the sourcing of 
concrete, steel and timber, as well as energy use within the home and 
commercial buildings.
Socia l impact o f proper t y
At its most basic, the social impact of property is its primary purpose: 
it prevents homelessness.
Beyond providing homes, property also provides workplaces, 
contributes to local environments and builds communities.
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A look around any town or city centre in the UK will reveal that 
priorities for property development have been very different over 
the years. The post-war years’ priority was to build as many houses as 
possible as quickly and cheaply as possible and this is reflected in the 
design of streets and homes of the time. Now, ‘Place-making’ is the art 
of piecing properties with different purposes together in a way that 
suits people’s lives and honours the environment – it has become the 
goal of development.
The investment trust sector provides an opportunity to consider 
the social benefits of property investment. There are a number of 
investment trusts that have a focus on care homes, social housing and 
accommodation for homeless people. 
The following quotes, gathered by the Association of Investment 
Companies, are from some of the chief executives and managers 
behind a number of investment trusts with a focus on social impact 
from property.
Paul Bridge, CEo of Civi tas Social Housing
“The strategy provides high-quality, long-term homes within local 
community settings for the most vulnerable people in society in order 
that they can receive appropriate care and support. The objective is 
to achieve better personal outcomes whilst offering savings for the 
public purse against the cost of more remote, institutional provision. 
Typically residents have a long-term significant care need such as a 
learning disability, mental health issue or autism. Alternatively they 
will require support as a result of being homeless, having suffered 
from domestic violence or coming out of hospital care and requiring 
support before returning home. The average age of our residents is 
presently 33 and the greatest area of demand is often young people 
coming out of children’s services and requiring long-term adult 
provision. At any time, there is much greater demand for appropriate 
adapted community housing than supply.”
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Kenneth MacKenzie, investment manager of target Healthcare 
rEit
“We love our mums and dads, and perhaps especially our grampas 
and grandmas. We want to have them well looked after and cared for, 
especially in old age, when frailty and dementia are prevalent. Great 
care homes do that really well.”
Jeremy rogers, por t fol io manager of Schroder BSC Social 
impact trust and Cio of Big Society Capital
“In the UK, an increasing number of impact-driven organisations are 
developing investable solutions to significant UK social challenges, 
but they can lack access to capital to scale. We invest in the more 
proven models and managers in private markets that can deliver high 
social impact alongside good risk-adjusted returns to investors, with 
low correlation to mainstream markets.
“We target investments benefiting more vulnerable and disadvantaged 
people, tackling issues such as homelessness, domestic abuse and 
children on the edge of care. We invest in three asset classes – high 
impact housing, debt for social enterprises and social outcomes 
contracts. In each area, our investments receive revenue primarily 
from government sources, which have historically been resilient 
through economic cycles. We look for areas where enterprises can 
generate significant savings for government and society, which can 
also provide additional revenue resilience.”
Andrew Cowley, managing par tner at impact Health Par tners llP, 
the investment manager to impact Healthcare rEit
“Our portfolio provides crucial infrastructure supporting vulnerable 
elderly people across the UK. Our tenants use our assets to provide 
an essential care service, demand for which is not directly correlated 
with economic conditions. In the UK, we see sustainable growth in 
demand for elderly care in the main part due to a rapidly ageing 
population, constrained supply of beds not keeping up with this 
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demand, and a highly fragmented market with demand for dementia 
care forecast to grow.”
Paul Bridge, CEo of Civi tas Social Housing
“It is important that the provision of specialist accommodation is 
delivered in close collaboration with local authorities and families. 
This is to ensure that the accommodation is adapted appropriately, is 
well located within a community setting and the rent is fair against the 
nature of the specialist provision. We rigorously test all these issues 
prior to the acquisition of existing, or financing of new, developments 
and have rejected over £600 million of transactions for some or all of 
these reasons. Demand risk is mitigated by delivering a quality offering 
that is attractive to both local authorities and families. From a macro 
perspective it is mitigated by the fact there is very significant demand 
as a result of individuals wishing to live within their own communities, 
and by growth in many of the underlying conditions.”
Jeremy rogers, por t fol io manager of Schroder BSC Social 
impact trust and Cio of Big Society Capital
“Given the high weighting of government revenue, policy risk is 
an important factor for our investments. We focus on a number of 
factors that can help mitigate this. We target issues that can have a 
transformational impact on people’s life chances, which are a priority 
across the political spectrum and have historically had more stable 
funding sources. We aim for diversification across policy areas, so 
the portfolio is not overly exposed to any particular policy change. 
We look for investments that have contracted revenue and/or asset 
backing, which can provide an additional mitigant to policy change. 
Finally, and most importantly, as the government savings from our 
investments are often multiples of the cost, they have greater policy 
resilience in a constrained fiscal environment, as we have had for the 
last decade or so.”
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Andrew Cowley, managing par tner at impact Health Par tners llP, 
the investment manager to impact Healthcare rEit 
“Our top priority is to help protect the wellbeing of the group’s tenants, 
their residents and their healthcare professionals, as well as wider 
stakeholders, and to responsibly support and deliver value to them 
over the long term.During the early weeks of the outbreak, we focused 
on understanding the effects of the pandemic on our tenants’ staff 
and residents, and shared areas of best practice performance amongst 
our tenant group. We listened to tenants’ concerns on the availability 
of PPE and sourced a bulk order of PPE that was distributed among 
these tenants that needed the support. As the pandemic environment 
stabilised, we began discussing ways to support them with occupancy 
recovery plans, where required. A key theme was the benefit of 
thermal imaging cameras to help monitor the health of those entering 
the home. We agreed a funding and roll out programme across all 
of our homes.”
Most exc i t ing por t fo l io themes
Kenneth MacKenzie, investment manager of target Healthcare rEit
“Modern, purpose-built real estate, with bedrooms all having en-suite 
wet room facilities, helps our seniors to live in a holistic, generous and 
loving retirement community, and their carers to have appropriate 
facilities. The complete anomaly of the sector is that only 27% of the 
beds have appropriate en-suite facilities.”
Jeremy rogers, por t fol io manager of Schroder BSC Social 
impact trust and Cio of Big Society Capital
“Across the areas we invest, the central theme is the ability to have 
significant and lasting social impact, alongside generating significant 
savings for government and sustainable returns for investors. We are 
looking for investments that bring together a number of complementary 
characteristics that drive value. An example of a recent investment 
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is Positive Steps Partnership – this is a Dundee-based charity that 
has been supporting drug users and ex-offenders for over 30 years. 
Dundee has the highest level of intravenous drug deaths in Europe, 
and Positive Steps has built significant experience and positive results 
in working with this group. Our investment is helping it to bring its 
provision of accommodation and expertise to a greater number of 
people in need – supported by statutory funding sources.”
Paul Bridge, CEo of Civi tas Social Housing
“The theme we are most excited about is being able to not only provide 
quality homes for those most in need with a lower risk to investors, but 
also being able to produce an outstanding level of social impact. This 
is demonstrated through independently measured substantial savings 
to the taxpayer of over £60m a year, outstanding transformations 
in residents’ life experiences, again independently measured, and 
the ability to bring large scale institutional quality in terms of asset 
management, carbon reduction and management.”
Key ESG oppor tun i t ies in proper t y
Environmental
• Domestic and commercial renewable energy installations.
• Energy efficient (A or B rated) buildings.
• Use of sustainable construction materials.
Social
• Access to essential services and green spaces.
• Desirable communities; local living.
• The ‘build to rent’ sector, which currently has a pipeline of around 
150,000 homes, according to the British Property Federation. 
• Provision of affordable, quality rental accommodation.
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Key ESG r i sks in proper t y
• High cost housing; poor, rushed planning decisions. 
• Poor quality builds (for example the Grenfell Tower and associated 
cladding scandal).
Companies to look ou t for and what they are doing
• British Land – whole portfolio net zero by 2030; local charter for 
place-based impact.
• Legal & General – urban regeneration; build to rent.
Funds and t rus t s to look ou t for
• Derwent London
• FP Foresight Sustainable Real Estate Securities fund
• Home Reit (alleviating homelessness)
• Legal & General UK Property Fund
Fur ther resources
• British Property Federation: bpf.org.uk
• National Housing Federation: www.housing.org.uk/about-us
• UK Green Building Council: www.ukgbc.org
• World Green Building Council: www.worldgbc.org
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C H A P t E r 2 : i n v E S t i n G F o r t H E ‘ S ’ – S o C i A l
i nves t ing for the 
‘S’ – Soc ia l
C
H
A
P
TE
R
 2
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What is social invest ing?
t he ‘S’ bit of ESG has arguably taken a back seat in the last couple 
of years as global policy and regulatory focus have turned to 
carbon emission reduction goals and reaching net zero.
There is a feeling too that environmental outcomes may be easier 
to measure for companies and asset managers and that the social 
impact of a company’s activity may be somewhat woolly, can change 
more easily or be viewed more subjectively and can end up becoming 
hotly debated.
It’s worth noting the overlap between environmental goals and social 
goals, such as ‘clean water and sanitation’. As Nadia Al Yafai, head of 
mutuality and impact at Royal London, said in a recent LinkedIn post: 
“Climate impacts are social impacts… Enabling a just transition is, after 
all, about the impact on people of the move to net zero.”
What we can say with certainty is that all businesses have some kind of 
social impact, or else they wouldn’t exist.
The UN SDGs that have a social focus are a useful guide to what 
investing through a social lens might look like. These are:
• No poverty
• Zero hunger
• Good health and wellbeing
• Quality education
• Gender equality
• Clean water and sanitation
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• Decent work and economic growth
• Reduced inequalities
• Peace, justice and strong institutions
The scope for debate over the true social impact of an activity applies 
in almost all of the sectors considered most key for social investors. 
Social impact investing is like a coin – it always has two sides; what 
matters is which one is facing up. Figure 11 shows how context and 
intention can be important in assessing social impacts.
Figure 11: Context and intention
Potential for social good 
argument example
Potential for social harm 
argument example
Healthcare Eradicating disease Creates health inequality 
through, for example, drug 
availability and pricing
Technology Better access to information 
and education
video game addiction
Construction of homes 
for private rent
Provision of housing rents may be set at an 
exploitatively high level
An MSCI report from June 2021 demonstrates that just because a 
company is in the healthcare sector, this doesn’t mean it will score 
highly in the category of promoting health.
This seems counter-intuitive but it is an important point: investing 
in large US-based pharmaceutical giants may be healthcare, which 
clearly pertains to the UN’s Development Goal 3: Good Health and 
Well-Being, but because of other impacts, the overall social impact of 
that company may be lower than you would think.
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Figure 12: MSCI ESG Healthcare Funds and SDG 3
We find that only 47 funds that invest globally in healthcare and allied 
industries had greater than 50% alignment with SDG 3, comprising 
just 0.51% of all healthcare funds and 15% of total healthcare fund 
assets. Digging deeper, we found that correlation with ESG criteria was 
low and that the most-favoured companies among the SDG3-aligned 
funds were US biotech companies.
Most SDG 3-aligned funds were invested globally.
●	 Global 64%
●	 uS 24%
●	 China 4%
●	 Brazil 2%
●	 Europe 2%
●	 Japan 2%
●	 Korea 2%
64%
24%
4%
2%
Source: MSCi
Why is social impact hard to 
measure?
The reason that charity and not-for-profit organisations exist is 
that some activities may be best left out of a system designed to 
produce profit.
The ability of companies to meet social objectives depends largely 
on the executives running a company and the governance structures 
T H E E S G I N V E S TI N G H A N D B O O K
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within it. With the best will in the world, profit motivations may at 
times be socially exploitative rather than beneficial; it’s even possible 
for profit to produce social good and harm at the same time, in 
different areas, as Figure 12 demonstrates.
Exploitation of workers and customers may be the most direct social 
harms that can arise from companies themselves not investing 
sufficiently in the S of ESG. A recent study by the Social Markets 
Foundation found that some of Britain’s biggest companies are 
routinely ignoring the issue of poverty among their own workforces.1
The Social Market Foundation found that annual reports of FTSE 100 
companies mentioned the word ‘environment’ 64 times but mentioned 
poverty once. Meanwhile, ‘in-work poverty’ continues to rise.
“Two reasons why workforce poverty isn’t a topic many businesses focus 
upon as part of their ESG activities, are:
• The immediate incentives to encourage such interest are 
not in-place.
• The potential longer-term commercial benefits of implementing 
measures (which can directly help reduce in-work poverty) have 
not always been clear and widely understood.”
It added that ESG standards, kitemark, codes of practice and 
benchmarks can help incentivise change in business behaviour, in 
positive ways.
A recent report by the International Trade Unions Confederation 
focused on workers’ rights, ‘Towards mandatory due diligence in 
human supply chains’,2 made eight recommendations:
1. All companies covered: the obligation to conduct human rights 
due diligence should be imposed on all companies, regardless of 
their size, structure, or ownership.
2. Obligations throughout corporate structures and business 
relationships: the obligation to practise human rights due 
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diligence should extend to entities to which business enterprises 
are connected through investment and contractual relationships.
3. Internationally recognised human and labour rights: the 
obligation to practise human rights due diligence should extend 
to all internationally recognised human rights, including labour 
rights, without distinction. Companies should also be expected to 
carry out due diligence with regard to their environmental impact, 
including climate impact.
4. Workplace grievance and remedy mechanisms: business enterprises 
should be required to establish or participate in effective 
operational-level grievance mechanisms with a view to identify and 
remediate adverse human rights impacts.
5. Monitoring and sanctions: enterprises’ human rights due 
diligence obligations should be monitored by a competent public 
body, and violations of such obligations should carry effective and 
dissuasive sanctions.
6. Liability: the requirement to practise human rights due diligence 
and the requirement to remedy any harm resulting from human 
rights violations should be treated as separate and complementary 
obligations.
7. Burden of proof: the burden should be on the company’s shoulders 
to prove that it could not have done more to avoid the causation 
of harm, once the victim has proven the damage inflicted and the 
connection to the business activities of the company.
8. Role of trade unions: human rights due diligence should be 
informed by meaningful engagement with trade unions.
Exploitation of customers can happen either within price or service. 
Various consumer rights legislation exists globally and within different 
countries around the world, and yet still regulators have to step in, 
levying fines and other penalties for poor practice.
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The social impact of a business may change at any given moment, 
so the point in time being considered is important. You might have 
companies that have historically been very good on wider social 
impact, but then a new CEO comes in more focused on the bottom 
line, and that changes.
One way to overcome the dilemma of not knowing is to look at how 
‘baked-in’ social purpose is to a company’s (or a fund’s) overall mission. 
How is the company structured? Has it set itself an objective to meet 
and report on strict social targets?
There are also many channels through which social impact can be 
delivered by companies. Some channels may have more immediate 
impact, such as CSR, the traditional mechanism through which large 
companies have managed their social commitments. However, using 
CSR alone is often criticised as a hands-off strategy of executives 
who have to tick some boxes but can’t (or don’t want to) see a way to 
‘embed’ better social practices through their main business activities.
There remains a role for CSR as part of the mix when considering a 
company’s overall social impact, through its primary business activity 
as well as charity efforts; however the focus has shifted towards social 
impact through companies’ main business activities.
There are many ways that social benefits can be targeted through 
primary commercial activities and many companies are demonstrating 
this. For instance, for some companies, social impact could mostly be 
achieved through training and education of the workforce. Or it could 
be through offering benefits to customers, or through the benefits to 
customers of using the product or service being produced.
Richer Sounds and Timpsons are routinely hailed as being companies 
with a high social impact through the treatment of their workforce. 
Timpsons trains up former prisoners to work in its shops, while 
Richer Sounds’ partnership structure means that employees own 
60% of the company. They, rather than external shareholders, are the 
beneficiaries of its success.
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Other companies may have high social impact because of the product 
or service they produce rather than through operations and human 
resource management.
Pearson, the educational book publisher, has a clear mission to meet the 
‘Quality Education’ goal of the UN SDGs through its primary product.
The top sectors and companies for social impact – according to 
Refinitiv – are shown in Figures 13 and 14, respectively.
Figure 13: Refinitiv’s top 10 sectors for social impact
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13
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10
9
8
7
6
5
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13
9
7
6 6 6
5 5 5 5
Source: refinitiv ESG data
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 14: Refinitiv’s Top 20 companies for social impact
Company 
Rank
Company Name Country Industry Overall 
Governance 
Score
1 International Business 
Machines Corp
United States of 
America
Software & IT 
Services
97.76
2 SAP SE Germany Software & IT 
Services
97.6
3 Tata Consultancy 
Services Ltd
India Software & IT 
Services
97.52
4 Microsoft Corp United States 
of America
Software & IT 
Services
97.4
5 Johnson & Johnson United States 
of America
Pharmaceuticals & 
Medical Research
97.21
6 Nestle (Malaysia) Bhd Malaysia Food & Beverages 97.13
7 BTS Group Holdings 
PCL
Thailand Transportation 97.1
8 Stockland Corporation 
Ltd
Australia Real Estate 97.07
9 Roche Holding AG Switzerland Pharmaceuticals & 
Medical Research
97.06
10 SEB SA France Cyclical Consumer 
Products
96.91
11 Gilead Sciences Inc United States 
of America
Pharmaceuticals & 
Medical Research
96.8
12 Dexus Australia Real Estate 96.76
13 Bayer AG Germany Pharmaceuticals & 
Medical Research
96.75
14 Merck KGaA Germany Pharmaceuticals & 
Medical Research
96.64
15 Nestle SA Switzerland Food & Beverages 96.58
16 Rallye SA France Food & Drug Retailing 96.5717 GlaxoSmithKline PLC United Kingdom Pharmaceuticals & 
Medical Research
96.53
18 Fleury SA Brazil Healthcare Services 
& Equipment
96.52
19 Greek Organisation 
of Football Prognostics 
SA
Greece Cyclical Consumer 
Services
96.49
20 Telefonica SA Spain Telecommunications 
Services
96.44
Source: refinitiv ESG data
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The B Corp movement
B Corps are businesses committed to positive change. Any business 
can apply for B Corp certification, but has to meet certain standards. 
These standards are set by the B Corp council and relate to the 
impact a company can demonstrate across five categories: governance, 
workers, community, environment and customers.
There are now more than 4,000 Certified B Corporations across over 
150 industries in more than 70 countries.
Not to be confused with Benefit Corporations, which are legal 
entities that are sometimes empowered to pursue stakeholder 
benefits alongside profits, certified B Corporations have certifications, 
administered by the non-profit B Lab, based on a company’s verified 
performance on the B Impact Assessment. The certification process 
also includes a legal requirement for a company to amend its Articles 
of Association filed with Companies House to include specific wording 
that legally commits the business owners to use business as a force 
for good by:
• Creating a material positive impact on society and the environment 
through your business and operations.
• Considering ‘stakeholder interests’ – including your shareholders, 
employees, suppliers, society and the environment.
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 15: Example B Corp certification score card – Bridges 
Fund Management
Publ ic ly t raded B Corps companies
Although many companies that are certified B Corporations are 
unlisted and therefore unavailable to private investors, a number 
are listed on global stock exchanges, or have subsidiaries that are B 
Corp certified.
B Corp l is ted companies and stock exchanges
• Australian Ethical (SX: AEF) – certified in 2014 as a public company.
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• Laureate (NASDAQ: LAUR) – certified prior to their IPO in 2017, 
IPO’d as both a B Corp and Benefit Corp.
• Silver Chef (Australia) – certified as a public company in 2015.
• O-Bank (Taiwan) – certified as a public company in 2017.
• Kathmandu (New Zealand) – certified as a public company in 2019, 
public since 2009.
• Benefit Systems (Poland) – first public company to certify in 
Europe in 2018.
• Amalgamated Bank (NASDAQ: AMAL) – certified prior to their 
IPO in 2018.
• Movida Aluguel de Carros (B3: MOVI3) (Brazil) – certified as a 
public company.
• Synlait Milk Limited (Australia-ASX: SM1, New Zealand-NZX:SML) 
– certified as a public company.
• Arowana International (Australia-ASX: AWN) – certified as a 
public company.
• Vivo Power (NASDAQ: VVPR) – certified as a public company.
• Cafe Direct: (www.ethex.org.uk/Cafedirect) – certified as a ‘public’ 
company but not listed on a well-known exchange.
• Holaluz (Spain-BME: HLZ) – certified Jan 2019 and went 
public Nov 2019.
• Lemonade (NYSE: LMND) – IPO’d as both a B Corp and 
Benefit Corp.
• Vital Farms (NASDAQ: VITL) – IPO’d as both a B Corp and 
Benefit Corp.
• Appharvest (NASDAQ: APPH).
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Public companies that have cer t i f ied a subsidiary
• Unilever (NYSE: UN) – certified subsidiaries: Pukka (UK), Mãe 
Terra (Brazil), Sir Kensington’s (US), Ben & Jerry’s (US), Olly 
Nutrition (US), Seventh Generation (US), Sundial (US), T2 Tea 
(Australia).
• B2W (B3: BTOW3) – certified subsidiary: Courrieros (Brazil).
• Procter & Gamble (NYSE: PG) – certified subsidiary: New 
Chapter (US).
• AB Inbev – certified subsidiary: 4 Pines Brewing Company.
• Azimut Group – certified subsidiary: AZ Quest.
• Banco Estado – certified subsidiaries: Banco Estado Microempresas, 
Caja Vecina.
• Campbell Soup Company – certified subsidiary: Plum Organics.
• Coca-Cola – certified subsidiary: Innocent Drinks.
• Fairfax Financial – certified subsidiary: The Redwoods Group.
• Gap – certified subsidiaries: Athleta, Hill City.
• Kikkoman – certified subsidiary: Country Life.
• Lactalis – certified subsidiary: Stonyfield Farm.
• Land O’ Lakes – certified subsidiary: Vermonta Creamery.
• Nestle – certified subsidiaries: Essential Living Foods, Garden of 
Life, Lily’s Kitchen.
• Oppenheimer Funds Inc. – certified subsidiary: SNW 
Asset Management.
• Rakuten – certified subsidiary: OverDrive.
• The Hain Celestial Group – certified subsidiaries: Ella’s Kitchen, 
Better Bean.
• Vina Concha y Toro – certified subsidiary: Fetzer Vineyards.
• Hortfruti S.A. – certified subsidiary: Hortifruti Chile.
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• Danone SA – certified subsidiaries: Danone North America, Alpro, 
Danone Waters of America, Danone Canada, Aguas Danone 
Argentina, Bledina, Danone Aqua Indonesia, Danone Egypt, 
Danone Iberia, Danone Manifesto Ventures, Danone UK, Grameen 
Danone Foods, Happy Family, Les 2 Vaches, Danone Waters 
Germany, Danone Dairy Ireland, Danone Waters Spain, Danone 
Netherlands, Danone Dairy Belgium, Nutricia Bago, Danone ELN 
Greater China, Danone Japan, Volvic.
Source: data.world/blab/b-corp-impact-data/discuss/publicly-traded-compa-
nies/4orsw6sp
There are 59 UK financial services companies that are registered B 
Corporations, as of January 2022, including:
• Abundance Investment
• Altor Wealth Management
• Bridges Fund Management
• Coutts & Company
• EQ Investors
• FORE Advisors LLP
• Holden & Partners
• Snowball Investment Management
• Tickr
• Triodos
• WHEB Asset Management
Socia l impact indicators
Good Finance, an organisation that helps charities understand social 
impact, has produced an outcomes matrix, which can be used to assess 
social factors when investing.
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A good test for whether an investment is socially beneficial is to 
ask whether it has any impact, positive or negative, in any of the 
following areas:
• Arts, heritage, sports and faith
• Citizenship and community
• Conservation of the natural environment 
• Employment, education and training
• Family, friends and relationships 
• Housing and local facilities 
• Income and financial inclusion
• Mental health and wellbeing
• Physical health
Source: Good Economy
Some of the social policies, issues and themes identified by the Fund 
EcoMarket website for investors are shown in Figure 16.
Figure 16: Fund EcoMarket social themes
Social
■		 Social policy
■		 Health & wellbeing policies or theme
■		 Human rights policy
■		 Child labour exclusion
■		 Water / sanitation policy or theme
■	 		 	responsible supply chain policy or 
theme
■		 invests in social property (freehold)
■		 oppressive regimes exclusion policy
■	 		 	demographic / ageing population 
theme
■		 diversity policy (fund level) anksto
■		 labour standards policy
■		 Fast fashion exclusion
■	 		 	un Global Compact linked exclusion 
policy
Source: Fund EcoMarket, fundecomarket.co.uk
How well any company or investment product does against these 
themes is a matter for continuous assessment, as it may vary over time.
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Focus on: Divers i t y and inc lus ion
Gender, ethnicity and sexuality are the social and cultural discussion 
points that are defining our generation. They are also therefore 
important to ESG investors and investee companies.
However, it’s fair to say that progress on fair representation of society’s 
many different groups is not universal in either camp. Diversity and 
Inclusion has claims on being the area where there is the clearest gap 
between saying and doing.
Corporate noise around key socialissues such as Black Lives Matter 
is encouraging – no doubt the realisations many of us had around 
George Floyd’s murder and the powerful global protest movement 
afterwards prompted soul-searching in every part of society, including 
in board rooms. Marcus Rashford’s image projected across the face of 
the London headquarters of Coutts, the Queen’s private bank, was the 
statement of the year.
This may be one area where branding is backed up by action, as there 
does appear to have been a flurry of hiring decisions to address low 
ethnic minority representation at board level. According to Thomson 
Reuters, the news provider, there was a 108% jump in the number of 
ethnic minority directors on FTSE 350 boards, from 59 in 2020 to 
123 in 2021.
As a result, 45% of FTSE 350 companies now have a director of colour 
on their board, up from 21% in 2020.
Gender equality in boardrooms is still behind targets.
While the Covid-19 pandemic has had some positive consequences 
here – for example, working remotely may have enabled more women 
with domestic and caring responsibilities to also hold down jobs and 
demonstrate their capability to do them at home – women remain 
woefully underestimated at senior level in investment firms.
Progress is happening on representation of women in workplaces 
around the world, although it is more notable in some sectors. 
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According to the latest Bloomberg Gender-Equality Index, published 
in January 2022, the financial sector had the highest average global 
score of 73% – 7% higher than the previous year. The Bloomberg 
Index scores companies across five key pillars:
• Women’s leadership and talent pipeline
• Equal pay and gender pay parity
• Inclusive culture
• Anti-sexual harassment policies
• Pro-women brand
Figure 17: Gender-Equality Index (GEI) scoring methodology
70
30 30
25
25
10
10
Source: www.bloomberg.com/gei/resources
This strong representation of women in the financial services 
workforce is backed up by a separate study by Deloitte, which showed 
the proportion of women in leadership roles within financial services 
firms has modestly risen from 22% to 24%. However, it is projected 
to grow to 28% by 2030 (although it bears mentioning that in 2019 
that number was projected to be 31%). There remains a troubling gap 
between the proportion of women in senior leadership roles and the 
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smaller proportion in the C-suite, currently standing at 9% but likely 
to widen to 14% by 2030.
Of course, women being represented at all levels matters, but progress 
at a senior level is the real benchmark for change.
Female representation also matters for meeting wider ESG targets. 
Strong diversity means a better chance of ESG ratings improving, 
which, now that ESG rankings and green labels are going public, 
provides a clear business incentive to hire more women at senior level. 
As Amy Clarke, chief impact officer at Tribe Impact Capital, writes in 
a blog for ESG Clarity:
“A report from the University of Adelaide found that for every 
woman appointed to the board, a business reduced its chances of 
being sued over environmental violations by 1.5%. The University of 
Hong Kong also found that businesses with women CEOs produced 
less air and water pollution and greenhouse gas emissions. They 
also received fewer environmental penalties, compared to firms 
with male CEOs. Businesses also demonstrated higher awareness 
of environmental protection, reflected in their 10-K filings, when 
led by women CEOs. With data like this, and knowing what the 
empowerment of women leads to, it is time gender lens investing 
in all its glory went mainstream.”
On representation of ethnic minorities at senior levels within 
organisations, there is clearly work to be done.
The Parker Review of Ethnic Diversity on boards originally set a target 
for each FTSE100 board to have at least one director of colour by 2021 
and for each FTSE250 board to have the same by 2024.3
By March 2021, 74 of the FTSE 100 companies in the UK had met this 
requirement.
The laggards are:
• 3i Group
• Auto Trader Group
T H E E S G I N V E S T I N G H A N D B O O K
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• Aviva
• BAE Systems
• CRH
• Croda International
• DCC
• DS Smith
• Entain
• Evraz
• Ferguson
• HomeServe
• Imperial Brands
• Informa
• International Consolidated Airlines
• JD Sports Fashion
• London Stock Exchange
• M&G 
• Persimmon
• Taylor Wimpey
• Whitbread
Associated British Foods, Land Securities, Ashtead, Just Eat and Next 
either didn’t submit information or didn’t respond.
In December 2021 Schroders took a stand to drive better representation 
by writing to chairs of FTSE 100 companies warning that from this 
year, it will vote against the nominations of committee chairs where 
the company board lacks ethnic diversity.
A statement from Schroders said: “To ensure the sustainability of the 
pipeline of diverse director candidates it is imperative that companies 
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are developing a robust board candidate pipeline and plan for 
succession, and that they encourage and support candidates to take 
on board roles.”
Pragmatism versus per fec t ion
A defence of modern technology and social media
We live in an imperfect world and the investment universe is a reflection 
of that world. ESG promotes and arguably exploits an idealism – a 
longing for a perfect world that doesn’t yet exist but that we might 
be able to invest our way to. The difficulty with this is what do you 
invest in if the perfect world and therefore the perfect investments 
don’t exist yet? Or maybe some of them do, but not quite enough to 
construct a well-diversified portfolio, or they don’t exist at a sufficient 
level of maturity to cope with the inflows from well-meaning investors 
seeking a conscience-friendly home for their money?
For fund managers committed to different styles of investment within 
ESG, whether they specialise in stewardship, positive impact or a 
green approach, the issue of ‘pragmatism versus perfection’ arises 
frequently. There is a need to invest and to do so in a way that creates 
long-term value for all stakeholders including the planet and society, 
but not always clarity over what will deliver this and for how long.
The following interview with the Global Stewardship Team at Baillie 
Gifford sheds some light on how this tension can play out in investment 
decisions, explaining their approach and views on some topical areas 
where there may be a dispute between whether a company or activity 
is socially beneficial – or not.
Within Baillie Gifford’s funds are large investments in US tech 
companies, such as Tesla and Shopify. The team explain how 
stewardship can be a pragmatic way to create positive change for the 
environment and society.
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In ter v iew wi th the Bai l l ie Gi f ford 
Global S tewardship Team
Are uS tech companies 
soc ia l ly cont rovers ia l?
The technology conundrum is something we 
get asked about a lot by clients, stakeholders 
and employees.
Over the last twenty years we’ve had this 
explosion of functionality from a range 
of different tech companies – and the 
growth of products we’d never envisaged 
– like Facebook, Google Maps and Google 
Search. These are all new ways that give 
access to the good, the bad and the ugly. 
There is a set of tools here that is very new to 
society; we are learning how to use those tools 
but also what the guardrails might be.
The benefits and risks of these new tools are analogous to 
the unprecedented flexibility and personal choices people had when 
they could jump in a car for the first time and go wherever they wanted. 
The car had enormous social benefits, but of course some costs too: 
accidents and deaths. These were noticeably higherbefore the advent 
of regulation, airbags, driving tests, seatbelts and MOT tests. Society 
caught up and we got to a good compromise, retaining the benefits of 
technology but with some sensible constraints on usage.
With technology, we’re not at that point yet. For instance, if you take 
Facebook and everything it offers, it has created new public forums 
but with very light-touch regulation. They have regulation around 
illegal statements or behaviours, but even that relies on good AI to 
detect those behaviours quickly, wrap them up and shut them down. 
There is no social precedent for this at such a scale and intensity.
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There is also the problem of selection bias. Algorithms create an echo 
chamber effect by giving people what they want while also connecting 
globally with a range of people who share the same views in a narrow 
(and sometimes unhelpful) way. That’s a negative.
As stewards, we need to understand the context but keep pushing 
companies to get a better handle on the extent of their impact.
Some people want to shut down these products entirely – that’s an 
extreme view.
Are b ig tech companies tak ing these i s sues ser ious ly?
Most big tech companies are pointing in the right direction. They are 
aware of what they need to do to maintain their social licence to operate.
They don’t live in the ether, and their activities are not decoupled 
from normal regulation. They’ve learned they are anchored in society 
and subject to society’s regulation.
There is a feeling of bias against big: the bigger you get, the harder it is 
to maintain goodwill and trust. All the tech and social media giants are 
facing that. As they have scaled very rapidly, each has had issues, some 
of which will come back to haunt them. This could be in the form of 
an ex-employee who exposes a risk. Sometimes, they are making a 
contemporary point, whereas some may be historic issues on which 
the company has taken steps to move forward.
Companies are very mindful that their pathway to future growth 
depends on feeling trusted. That doesn’t mean getting everything 
right in real time on every issue; it means to have trusted organisational 
governance to address issues quickly, learn from mistakes and take 
into account social concerns when they develop new products we 
haven’t even seen.
Tech companies use AI ubiquitously – in thousands of ways – so must 
be fully cognisant of issues like algorithmic bias and feedback loops.
At Baillie Gifford, we have our own data ethics group. We’ll be 
T H E E S G I N V E S T I N G H A N D B O O K
9 6
discussing these issues for many years to come. But they are complex, 
because outlier cases matter. Let’s say 95% of Instagram users get 
nothing but enjoyment; they think it’s a great way to see trends, and 
they can manage use of the app in a way that doesn’t take over their 
life, using it to catch up with friends. On the whole, that is a positive 
experience. But the other 5% who don’t have this positive experience 
really matter. Particularly if this occurs as a concentration within 
vulnerable groups – teenagers with body anxiety, for example. Tech 
companies have caught up with the fact that these are really important 
issues for which they have responsibility.
They can’t respond by saying we’re just a platform: if you offer the 
tools that enable things to happen, you bear responsibility for how 
those tools are used.
How can inves tors engage wi th companies?
We own many companies and vote at every AGM we are allowed to vote 
at: that is a core part of what we do in stewardship. Many companies 
are hard to reach. When they do engage it can be very stage managed 
and very legalistic. You will often get diverted to a statement on a 
website, because there is lots of legal interest in their answers. There 
is nervousness about overly honest engagement.
But then there are some companies demonstrating best practice in 
the tech sector: NVIDIA, the computer systems design company, is a 
good example. It gives time to engagement and is responsive. Another 
tech company we engage with is Shopify, which has a very responsive 
approach on ESG.
There is a skew towards newer tech companies being good at this. 
They have been able to learn from the first generation and refine 
their approach and their PR strategy around maintaining goodwill. 
For example, Shopify doesn’t compete with its merchants, which 
builds goodwill.
In terms of other tech companies, not all are labelled as bad guys; 
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there is a spectrum of positioning. Apple has had its challenges. An 
interesting hardware development worth singling out was Apple’s 
upgrade in iOS 14 to introduce the orange dot, which lets phone users 
know when an app is using the microphone – this was a fundamentally 
important change to privacy control.
An interesting thing about this kind of technology is that disgruntled 
people still use the product. As a society, we are using more of it all the 
time. There is no sense of transitioning away. The activist world has 
been transformed by tech tools. We now have the ability to campaign 
with just a smartphone and reach millions of people. There are many 
positive use cases.
This is why the tech debate won’t stop, and we all need to get stuck into 
it. We all have a say in how to make it work because we are all using 
the products, so the question is, how do we make each generation of 
product better than the last?
We all need to learn about moderation of use, for example, which 
includes adults. We have all had to learn how to manage our 
smartphones and not be managed by them. This is a work in progress. 
Behind climate change this is the other really big global, systemic 
issue: how we get the best out of technology.
We need technology to deal with global issues. It can be used to 
assist in dealing with our environmental challenges. The tracking of 
emissions, waste and water, for example, is massively enabled by tech 
devices and sensors.
It can also be used for inclusion. Every day, millions of people are 
coming to tech for the first time, getting access to reliable information 
and market prices. Online shopping lets you compare local merchants, 
not to mention there is online entertainment. These are things we 
maybe take for granted, but they are massive social positives.
How can you measure the soc ia l pos i t i ves?
The holy grail of ESG is developing reliable scientific methodologies 
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that everyone can agree on. This is really hard to do for social factors. It 
is harder than for environmental factors, which are more measurable. 
Having said that, at COP26 a lot of the focus was on biodiversity and 
nature: the Taskforce for Nature-related Disclosures (TND) is behind 
the Taskforce for Climate-related Financial Disclosures (TCFD). It is 
really complicated to measure and account for nature, more complex 
than for climate impacts, which is pretty straightforward.
Social factors are also really hard; you get into different views, within 
and across societies. For example, some societies place more value 
on collective security and collective wellbeing. Others are more 
individualistic. So there are different starting points for the score card 
that depend on whether something is considered a big deal or not 
in that location. Looking at teenage mental health as an issue that 
has been in the news a lot in the UK, for example: to what extent 
has technology had a negative impact? You can very quickly enter 
subjective territory once you start asking such questions.
When determining how to measure social factors, there are weighting 
questions and boundary questions. Thinking more about teenage 
mental health and body image, if you take a scientific approach you 
would consider what number of people had been affectedover a given 
time period. Then there is a calibration question: were they right to 
be affected, or not? Was that a fair and reasonable reaction to some 
content they saw? We then encounter the boundary question when 
determining who is responsible for that impact. If a parent gives a 
nine-year-old a mobile phone and connectivity to social media, and 
they then tick the box that says “I am 13” and see an inappropriate 
image, who is responsible? It’s not straightforward.
Scoring net social impact is fiendishly complex, but it is the process 
that matters: asking the right questions, being vigilant and committed 
to trying to answer the questions, even if you never get to the answer.
It is worth noting that different countries have nuanced views on 
data privacy and state surveillance. In some countries surveillance is 
expected and accepted – it’s a positive. So there is cultural relativism 
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at play. Having said that, some of our discussions have more in 
common than you might think. Most individual users of tech have 
similar aspirations for what they want to use it for. So there’s a lot of 
commonality too. There’s a regulatory layer to this and also a social 
licence to operate, and there are different expectations for each.
There’s another really complex debate around whether it’s OK for tech 
companies to resist law enforcement requests. That’s polarised people 
– some think it’s terrible that they aren’t helping law enforcement do 
its job. Others think it’s great that tech companies are doing what 
they said they would do: encrypting personal data and keeping it 
safe and secure.
We are a global firm investing in global products. We try to come 
at issues from the same direction, which is to look at what are the 
consistent, universal principles that should form the lens through 
which we look at these issues. Also, what are the culturally relative, 
country-specific factors we need to take into account?
With healthcare, the broad goals are similar across countries. There 
are scientific and practical nuances around ethnic groups; there is, 
rightly, a lot of debate about the efficacy of different kinds of medical 
developments and how universally appropriate they are. Have they 
been trialled on a specific dataset, e.g., European or US-centric 
groups? Does the tech work as well with other ethnicities and in other 
geographies?
While there is a lot of consistency among countries’ broad goals for 
healthcare, priorities may be different depending on where they are 
in their development curve. Some countries are at the basic sanitation 
and primary healthcare stage, while others are focused more on 
problems like Alzheimer’s disease and Parkinson’s disease and so are 
interested in Denali Therapeutics’ work on the blood/brain barrier.
There is a lot of healthcare in our portfolios – there is a type we 
particularly like: innovative, data-led companies with the potential to 
personalise medicine through DNA sequencing, for example.
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Healthcare is the clearest-cut sector offering the most good that can 
be done. However, that has to be qualified, as we are looking only at 
a certain kind of company: research-and-development- and data-led 
disruptors offering radically different treatments and cures for certain 
illnesses. Our approach is less about large drug conglomerates or 
health insurance, which as services are not disruptive or offering 
outstanding service. You have to pick your companies carefully 
in healthcare. There is a social headwind rather than tailwind. 
Transportation is another big sector for us in the healthcare space. 
Electric vehicles (EVs) are a big theme, as is the ecosystem around them, 
such as battery companies and other companies in the value chain.
One thing that sometimes gets overlooked when we are talking about 
EVs is that they deal with two huge issues at once: not only climate 
change but also local pollution issues in cities. The latter is a massive 
health issue around the world – the net positive impact of EVs is very 
significant when you also consider this benefit.
There are caveats and issues around the supply chain. Lithium and 
cobalt have to be produced in the right way, respecting labour issues 
and human rights. Big EV companies like Tesla are on top of making 
supply chains as responsible as possible.
i s there an Ev equiva len t o f o i l sp i l l s in the ocean?
EV battery recycling has a question mark over it. Some think the 
batteries will be useful for many years to come, for instance as back-
up household batteries. They could be charged by solar panels and 
used on houses overnight. There is a lot of research and development 
work currently being undertaken in this area, led by Tesla, because of 
awareness of the negative impacts of EV batteries. They are working 
on doing their bit and trying to influence this beyond their business 
of EV manufacture.
On a philosophical point, it is important for asset managers to be 
pragmatic and realistic. It is tempting to only invest in companies 
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and funds that already have a positive impact, but the world doesn’t 
work that way. The supply chain will be dependent on other sectors 
with other impacts, for instance lithium and cobalt. To get the benefit 
of these innovations, we need responsible mining companies, so we 
need to back them doing the right thing. It is perfectly reasonable 
that a fund should invest in a best-practice mining fund. Hopefully 
the asset management world will maintain its relevance by helping 
real world companies transition. They need that help even more. 
Ultra-clean established companies may be good investments, but they 
don’t offer the same additional benefits to invested capital as can be 
gained by helping a real-world company improve (when you have a 
good management team committed to the transition).
How do you engage?
There are broad similarities across our funds for how we apply 
stewardship and different types of engagement for different purposes. 
There are engagements for information gathering, where we are 
trying to work out where the company is on a certain issue. Other 
engagements are more directive, where we outline what progress we 
want to see and support companies as they work to achieve it. Others 
occur when something hasn’t worked out, and these are even more 
directive, involving a shareholder resolution and a threat to sell if 
there is no resolution. These are few and far between. So there are 
different types of engagement and different ways of running these 
meetings. In general, engagement has exploded. There has been an 
engagement frenzy. Lots of people want to engage companies and 
evidence that they have taken stewardship seriously. We need to be 
careful about that. We are already dealing with finite management time 
and resources. It is not clear how much is achieved by unstructured 
engagement on lots of issues at lots of companies. We have found the 
best engagements are research led, when we have done some work, 
so we bring something to the meeting and are not just asking lots of 
tough questions but trying to offer thoughts and comparative ideas. 
We sometimes have examples from different sectors and can pass 
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these on to management and say, “Company X thinks this is a good 
idea. What do you think?”
Looking forward at emerging issues, where there is not yet a lot of noise, 
we use our own proprietary research to identify themes we think will 
become prominent and where we think there’s an issue, then engage 
early with teams. These are more collaborative engagements, where 
we are not sure and we have not yet tested the thesis, but we look at 
something, we think it could become a bigger issue, so we ask what the 
companythinks, too. A good example is where we had early discussions 
with Amazon on how the algorithm ranked products on the platform; 
looking at things like whether review scores are authentic. We talked 
extensively about using AI to identify fake reviews and remove them 
from the platform. We found those discussions very constructive and 
useful, enabling us to get ahead of an issue and work collaboratively. 
Good stewardship means shared responsibility to help keep improving 
and innovating. It is good for us and them.
We want our companies to win and be successful, to have good 
stakeholder relations, good relationships with regulators and have 
great growth prospects. We don’t engage to trip them up and catch 
them out. We are thoughtful, honest long-term shareholders. Often, 
companies are doing everything they should be doing, they are the 
experts in their own business and know more than we do. Sometimes 
we can play a helpful role by encouraging something and giving 
support to move forwards.
When i t comes to ESG, can you have i t a l l? or do you 
natura l ly have to focus on one e lement?
When analysing how an investment measures up from an ESG 
perspective, you have to consider and agree the time frame. An ESG 
score might be different at different points in a company’s evolution. 
On a simplistic level, the idea that a company should be perfect 
on ESG at all points in time and not run any significant risks in its 
development is unrealistic – the real world doesn’t look like that. If 
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we look at companies that have transformed societies in the long run, 
you get a very different result depending on when you judge them. 
Consider the Edison Electric Light Company putting lights up in New 
York in the late 19th century: if we were rating it at that point in time, 
it was a new technology that was risky and untested; there was so much 
that could go wrong that you could assess it as an F from an ESG 
perspective at that time. But for more than 50 years electrification 
has been one of the most positive drivers of development in every 
society. All big developments in living standards, democracy, law 
and education – these are all derivatives of electrification. Electricity 
replaced dangerous gas lighting.
Timeframes really matter. For those of us assessing sustainable growth, 
context is very important – we consider the potential impact over 
many decades, not just the risks today.
Early growth companies have a lot to deal with – they are not 
sophisticated on reporting and they do not have big ESG teams. Not 
having the time to think about it doesn’t mean they are not doing 
the right things, but maybe they don’t have all the right policies and 
paperwork yet. In founder-led companies, the founder often has 
multiple roles – like chair and CEO – so it’s then about understanding 
those governance structures. It comes down to the integrity of 
individuals, their vision and long-term purpose. It is not just about 
structures, it is more nuanced than that. Very mature, listed companies 
that are widely held by lots of owners with a hired ownership team 
rarely think long term and rarely drive transformative businesses, so 
why use that as your model of what great governance looks like and 
score down early-stage businesses.
We come back to this issue every day: the “Can we have it all?” 
question. We are always asking, “What are the trade-offs?” “Where 
can we give slack and what are the red-line issues?” This is why it 
is fun. It is also one of the most important but complex fields in 
the industry now, and the thinking is continually pushed. We are 
going to have to get this right. The ESG industry is nascent, but 
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there is massive responsibility to direct capital into funds that are net 
positive, whether they are formally responsible or otherwise. Real 
capital is now moving on ESG, so it is important to get it right. The 
next couple of decades are critical. ●
ESG sector focus : fash ion
Fashion, in particular fast fashion, presents some of the biggest 
environmental and social challenges. Supply chains in clothing 
manufacture are notoriously difficult to unravel and globally fashion 
contributes 4% of carbon dioxide emissions, according to calculations 
by the Global Fashion agenda and McKinsey, with extreme water use 
in the production of garments a particular concern. While it takes 
10,000 litres of water to make a pair of jeans, according to the UN, 
two billion people in the world live somewhere with inadequate water 
supply. The fashion industry relies on 98 million tonnes of non-
renewable resources every year, according to Fashion Revolution.
The rise of fast fashion – ultra cheap, throwaway items, is a significant 
culprit. £1 bikinis do not make themselves. The popularity of Missguided, 
Boohoo, Forever 21, Shein, Primark and New Look presents a difficulty: 
many of the purchasers of fast fashion are themselves likely to be 
on low incomes and unable to afford better quality clothing that is 
produced to higher environmental and social standards.
The fashion industry also does social harm. In 2013, the collapse of 
the Rana Plaza factory in Bangladesh killed 1,132 people and injured 
2,500. This was a tragic low point, but modern day slavery in supply 
chains, poor working conditions, long hours and poor pay remain a 
problem. According to the Global Slavery Index, $125bn of fashion 
garments that have been produced by modern slaves are imported 
to G20 countries every year. An estimated 70% of the clothing 
manufacturing workforce are women, so they are disproportionately 
affected by these issues.
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Key oppor tun i t ies in ESG
As Katherine Davidson, portfolio manager at Schroders, says:
“The fashion industry has the potential to contribute to all of the 
UN’s 17 Sustainable Development Goals.4 From empowering women 
to helping reduce pollution, changes in the fashion industry can 
bring about far-reaching positive social and environmental change.”
Fully traceable supply chains, recyclable materials and ‘forever’ clothing 
are all opportunities for fashion brands to grow their businesses and 
improve their impact. Even brands traditionally considered fast fashion 
have an opportunity to improve: last year, ASOS launched a ‘Fashion 
with Integrity’ (FWI) 2030 programme, committing to achieve Net 
Zero across the full value chain by 2030.
European regulation will spur action in the EU. Specifically, The 
Circular Economy Action Plan, introduced by the European 
Commission as part of the Green Deal in 2020, focuses on policies 
to support the circular design of all products as well as a ‘right to 
repair’. It stipulates that material use should be reduced and textiles 
reused. The European Commission encourages companies to move 
away from the fast-fashion business model and to find other ways to 
offer textile and fashion products by providing incentives and support. 
To reduce waste, EU countries will also have to separate textiles to 
enable more recycling. France was the first country to adopt a law 
prohibiting the destruction of clothing and shoes. Manufacturers and 
retailers with unsold stock have to donate or recycle it. Companies 
must also produce clothing with recyclability in mind. 
Regulations elsewhere are beginning to take root. In New York, the 
home of Sex and the City and Manolo Blahnik shoes, the Fashion 
Sustainability and Social Accountability Act was presented in January 
2022, which could make New York “the first state in the country to pass 
legislation that will effectively hold the biggest brands in fashion to 
account for their role in climate change.”5
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Key r i sks in ESG
Despite some progress, transparency over supply chains remainsthe 
biggest ESG barrier for the fashion industry. Overproduction and 
associated waste is another. According to Fashion Revolution:
• The majority of major fashion brands (99%) do not disclose the 
number of workers in their supply chain that are being paid a 
living wage.
• A significant 96% do not publish a roadmap on how they plan to 
achieve a living wage and only 14% of major brands disclose the 
overall quantity of products made globally.
• Most carbon emissions occur at processing and raw material levels 
and while 62% of big brands publish their carbon footprint in their 
own facilities, only 26% disclose this information at processing and 
manufacturing level and only 17% do so at raw material level.
• More than one third of big brands (36%) have published their 
progress towards reducing the use of virgin plastics for packaging, 
but only 18% do so for textiles deriving from virgin fossil fuels, 
which consumers are less likely to recognise as plastic.
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On supply chain traceability:
• Over a quarter (27%) of major brands now disclose some of their 
processing facilities (e.g., spinning mills, dye-houses and laundries) 
– up from 24% last year.
• 11% of major brands publish some of the raw material suppliers 
(e.g. cotton, wool, viscose) – up from 7% last year.
• Greenwashing in fashion and associated regulatory action to 
combat it is another risk. At the beginning of 2022, the Competition 
and Markets Authority had launched its first ever review of green 
claims in the £54bn a year industry, with a view to identifying 
whether companies are complying with the relevant consumer 
protection laws.
Companies to look ou t for and what they are doing
Despite the increase in sustainability-led branding, there are very few 
listed sustainable fashion brands – the most sustainable are private 
companies, such as Patagonia. But worth a look for those seeking 
greener fashion companies to invest in are Adidas, H&M and Levi’s. 
H&M is now known for its ‘Conscious’ range of clothing, launched 
in 2010 and a new ‘Stories’ range last year. It also ranked second on 
Fashion Revolution’s 2021 Transparency Index. While transparency is 
not the same as sustainability, it is considered a key first step that has not 
yet been fulfilled. Until transparency improves, sustainability remains 
difficult, if not impossible, to judge. The fashion sector remains at an 
early stage in its journey towards an acceptable level of transparency.
Companies to avoid for now
Zara, Uniqlo, Gap. Although each brand has something to say on 
sustainability – Gap has been rated ‘It’s a start’ by brand ethics tracker 
Good On You – these brands, as well as those fast fashion brands 
listed above, are considered relatively unsustainable, with insufficient 
visibility over supply chains.
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Funds and t rus t s to look ou t for
• BNY Mellon Sustainable Real Return Fund – excludes Primark.
• EdenTree Responsible and Sustainable Global Equity – invests in 
M&S, Next, Hugo Boss, Adidas and Nike.
• WHEB Sustainability – no exposure to fashion.
More in format ion on i s sues
• Fashion Revolution, Transparency Index 2021: www.
fashionrevolution.org/about/transparency.
• The Corporate Human Rights Benchmark by the World 
Benchmarking Alliance has score cards for fashion retailers: www.
worldbenchmarkingalliance.org/publication/chrb/companies.
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
i nves t ing for 
the ‘G ’ – 
Governance
C
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A
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111
What is governance?
o f all the concepts to grapple with in ESG, governance may 
be the slipperiest. What actually is governance? What does it 
involve? And how do we know if governance is good or not?
The ‘E’ and ‘S’ chapters that precede this one are about ‘investing 
for’. But you can’t really invest ‘for’ governance in the way that you 
can invest for the environment or society. Governance isn’t a real 
world thing, it’s a way of operating so that investment goals pertaining 
to the environment and society can be met. But it’s also good in and 
of itself in that it helps companies to improve their organisation and 
culture, to reduce risks and to meet corporate purpose, whatever 
that may be.
According to the Good Governance Institute:
“Good governance adds value. It is lean, transparent and ethical, 
focused on tackling operational challenges in ways that complement 
the big picture vision. It always seeks the best outcomes for 
stakeholders and is never content with merely staying out of trouble.
The best boards continually question their own governance. 
Whoever they are – from the smallest charity to the greatest public 
institution – they have a clear idea of their purpose and role and 
they understand that good governance is in everyone’s interests.
It’s the duty of board members to remain focused on broad, 
strategic goals while tackling day-to-day issues and meeting their 
responsibilities, so it’s incumbent on them to work with certain 
governance ideals in mind.” 
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A lot of governance work is about meeting agreed standards for process, 
which at its most basic can look like box-ticking. But most industry 
experts agree that it is the spirit with which those boxes are ticked 
and new boxes to tick are formed – and the way these processes are 
embedded and understood within the wider business – that can mean 
the difference between merely meeting standards and embodying 
good governance.
The context of the size of the firm and the industry is important. 
Not achieving good governance exposes a company to risk, which is 
why meeting governance standards is likely to sit in or alongside the 
compliance or risk function of a business.
There are several types of risks that companies manage. Governance 
sits at the heart of preventing them from materialising. All of them 
will in some way lead back to potentially derailing a company through 
financial loss, whether that’s value or profits, or both. With large 
companies, risk management can resemble a high stakes game of 
whack-a-mole. But with good governance, the idea is that the moles 
don’t appear quite so frequently, or in quite so many places.
It’s unrealistic to imagine that governance could be so good that 
no risks ever emerge. Particularly in a world suffering from climate 
change and global disease pandemics.
Many business risks – and by extension, investor risks – are connected 
to the wider risks to economic stability and civil society.
The World Economic Forum asked world leaders what the biggest risks 
were for the next ten years and ranked them as shown in Figure 18.
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Figure 18: World Economic Forum world leader responses
1st Climate action failure
2nd Extreme weather
3rd Biodiversity loss
4th Social cohesion erosion
5th livelihood
6th infectious diseases
7th Human environmental damage
8th natural resource crises
9th debt crises
10th Geoeconomic confrontation
■ Economic ■ Environmental ■ Geopolitical ■ Societal ■ technological
Source: World Economic Forum Global risk Perceptions Survey 2022
The extent to which individual companies can contribute to the 
minimising or strengthening of these collective risks goes beyond the 
products or services they offer. It includes their production processes, 
use of space and materials, interaction with supply chains and the 
way they treat customers and staff. And then the extent to which 
companies are able to contribute to the management of these risks 
from these many areas is within the remit of governance professionals, 
whether they are in compliance or strategic risk management. How 
well a company meets environmentaland social targets will ultimately 
come down to the strength of the governance – the ‘glue’ between 
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a business and its stakeholders. The following pages look at two 
governance-related issues: executive pay and tax.
Governance i ssue in focus : execut ive pay
As systemic issues go, the problem of egregious senior executive pay 
relative to other workers and the workforce at large is a nub issue 
– many other problems within firms can be traced back to unfairly 
unequal pay structures. How can you have a positive workplace culture 
that pulls together on issues of environmental and social importance 
when the junior staff are too anxious about their domestic finances 
to perform? Meanwhile, executives have the best life money can buy, 
regardless of company performance on key metrics, including ESG.
Since 2020, listed companies with more than 250 employees have had 
to disclose and explain executive to employee pay ratios. This is not 
just for the sake of it. The average chief executive had earned the 
equivalent of the UK average salary by 7 January this year.1 According 
to a High Pay Centre briefing in 2021: 
“Companies associated with low-paid work are at higher risk of 
reputational problems, as well as industrial disputes and employee 
engagement issues such as higher staff turnover and absenteeism, 
higher recruitment and training costs and lower productivity. The 
pay ratio disclosures could help investors to better identify where 
these risk factors are highest.”
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Figure 19: Average pay ratios and lower quarter pay across 
industries (2020)
Industry Average CEO/median 
employee ratio
Average lower quartile 
pay threshold (£)
Banks 88 34,100
Basic Materials 43 32,094
Construction & Materials 75 27,408
Consumer Goods 62 31,672
Financial Services 35 44,486
Health Care 87 35,071
industrial Goods & Services 71 27,501
insurance 59 34,222
Media 71 33,849
oil and Gas 81 40,704
real Estate 47 30,256
retail 140* 17,993
technology 39 33,290
telecommunications 49 30,472
travel & leisure 82 21,607
utilities 56 32,917
Source: High Pay Centre, highpaycentre.org
Why is pay such a tough nut to crack? One of the reasons is that the 
people at the top of the organisations with top-heavy pay structures 
are the ones in receipt of excessive pay packages.
In 2018, the Institute of Chartered Accountants in England and Wales 
(ICAEW) published a report called ‘How to end excessive pay’. It gave 
an action plan for boards, which recommended the following steps:
1. Treat everything as though it is public.
2. Recognise all of the reasons why pay is important.
3. Look at the entire pay structure.
4. Talk about fairness.
5. Use simple language.
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6. Lift the lid.
7. Have real conversations.
8. Admit mistakes.
9. Set out your pay principles.
10. Persist and be patient.
The rise of ESG metrics is a potential game changer for egregious pay 
– not in a good way if you are an executive currently on an unjustifiably 
high pay package. There are loud calls to link all executive pay to 
ESG metrics. According to a June 2021 report by PWC, 45% of FTSE 
100 companies now have an ESG measure in executive pay and 78% 
of board members and senior executives agree that strong ESG 
performance contributes to organisational value and/or financial 
performance.2
According to the authors of the report: 
“Including ESG metrics in executive pay packages is a tangible way 
to close the say–do gap for a skeptical audience, but is not without 
its challenges. There’s a risk of hitting the target but missing the 
point. An example might be a bank that focuses on reducing its own 
carbon footprint when the biggest effect it could have on reducing 
emissions is through changing its approach to financing companies 
that emit carbon. There’s a risk of distorting incentives. Research 
shows that incentivising pro-social goals can undermine intrinsic 
motivation, as reported in the Journal of Economic Perspectives. Or 
focusing on a narrow aspect of an ESG issue (e.g., board diversity) 
may distract from the broader objective (an inclusive culture).”
This could be one area where, in a roundabout way, ESG is able to kill 
two birds with one stone – improving company performance and ESG 
scores by tackling one area that is clearly ripe for change, but has so 
far proven a hot potato when it comes to fixing it.
While the pandemic had a dampening effect on executive pay rises 
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and bonuses, particularly among firms that accepted furlough money, 
there are concerns this was a temporary cessation.
Executive pay among FTSE 250 boards was 20% down in 2020 
compared with 2019, according to PricewaterhouseCoopers.
Shareholders have a history of being particularly active against what 
they see as excessive pay relative to performance. According to a 2021 
PwC report: 
“Where a minority of companies have proposed increases above 
the wider workforce level, the proposals were often met with 
shareholder pushback. Overall shareholder voting outcomes on 
remuneration reports have been more polarising this year, with an 
increase of very strong support (90%+) but also an increase in the 
number of companies receiving significant votes against (20%+). 
The majority of companies receiving a significant vote against their 
remuneration report related to shareholder concerns about the 
alignment of company performance with remuneration outcomes 
or significant salary increases.”
According to PwC, companies are also acting to align pension 
contributions of executive directors with the wider workforce, with 
45% already aligned and just over 90% due to be aligned by the end of 
2022, following Investment Association guidance and changes to the 
UK Corporate Governance Code.
There remains much work to be done on aligning executive pay 
to performance and to the rest of a company’s workforce, however 
the story so far is one of shareholder action and tighter governance 
guidelines improving the picture on fair pay.
Governance i ssues in focus : Tax
According to the Fair Tax Mark, an organisation set up in 2014 to 
promote the benefits to companies of paying taxes, almost 40% of 
multinational profits ($950bn) are artificially shifted to tax havens each 
year, leading to a $240bn reduction in corporate income tax revenue.
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The growth of tax havens and unethical corporate tax conduct 
have become prominent concerns across the world. Aggressive tax 
avoidance negatively distorts national economies and undermines the 
ability of responsible business to compete fairly, both domestically and 
internationally.
Yet tax avoidance by large companies has become a tacitly accepted 
business practice. Companies that can be praised for switching to 
100% renewable energy might remain guilty of not paying corporation 
taxes anywhere in the world. 
Paying tax is a social good. Without taxes, governments cannot meet 
public spending needs and ensure a fair society. 
On this basis, a company’s payment of tax should be a necessary part 
of an ESG assessment. As one KPMG director opined in an article: 
“Where is the T, in ESG?”3
In August 2019, PensionDanmark – together with the three large 
Danish pension funds ATP, PFA and Industriens Pension – published 
a common set of tax principles embedded in a Tax Code of Conduct.4
The principles behind the code were laid out as follows: 
“Tax revenue forms an essential part of a well-functioning society 
and constitutes a fundamental building block and funding 
source in achieving the UN’s Sustainable Development Goals 
which focus on improving welfare, justice, education, emergency 
services, health, and environmental protection indeveloped and 
developing countries.
“Internationally, there has been a growing focus on preventing 
aggressive tax planning and achieving increased transparency in 
the area of tax, resulting in a range of important international 
initiatives including the OECD’s Base Erosion and Profit Shifting 
project and the EU Anti-Tax Avoidance Directives. The Danish 
institutional investors ATP, PFA, PensionDanmark and Industriens 
Pension and the acceding parties recognise the importance of tax 
as an integral measure in achieving the UN’s sustainable goals 
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as well as the need for a common framework for responsible tax 
behaviour. The investors wish to support and contribute to these 
developments as part of their responsible investment strategy.”
The code then divided tax planning into two types: ‘non-aggressive’ 
and ‘aggressive’.
Non-aggressive tax planning, according to the code, aims to ensure 
fair competition and avoid double taxation through:
(a) General use of holding companies. 
(b) General use of available double taxation treaties where 
the business substance justifies the use of a specific double 
taxation treaty.
(c) General use of current and historic tax losses to reduce 
taxable income.
(d) General use of debt financing.
(e) Use of hybrid entities for non-aggressive tax planning.
Aggressive tax planning is exploitation of technicalities in a tax regime 
or exploitation of inconsistencies between tax regimes in order to 
reduce tax liability, through:
(a) Abuse of tax treaties, where holding companies which do not 
have sufficient substance in line with the OECD Principal 
Purpose Test, are used for the sole purpose of reducing or 
avoiding withholding tax.
(b) Transfer pricing planning for tax avoidance purposes.
(c) Use of financial instruments for aggressive tax planning.
(d) Use of hybrid entities for purposes of aggressive tax planning.
We know from research that non-payment of tax due is one governance 
issue that is widely understood and also widely loathed by the general 
public. A Christian Aid study in 2012, in the wake of the financial 
crisis, found that four out of five people agreed that tax avoidance by 
multinationals made them feel angry.
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Payment of tax is a fairness issue. The legal difference between tax 
evasion (illegal) and avoidance (legal ways to minimise a tax bill) has 
almost become irrelevant in public discourse around tax and paying 
a fair share.
When considering what ‘fair’ payment of tax can mean for investors, 
Anastasia Petraki, investment director at Schroders, says: 
“Although some may think that minimising tax may be in 
shareholders’ interests, the reality is that tax avoidance could be 
hurtful for them as well as the public finances. The regulatory 
attention it attracts – through initiatives such as the OECD’s base 
erosion and profit shifting framework – and reputational damage 
leading to consumer ‘boycotts’, can result in loss of company value. 
In the long run, avoiding taxes can undermine the infrastructure 
on which companies rely in order to operate without disruptions; 
for example, road maintenance for transport of goods and state-
funded education that is needed for skilled employees.
“So tax avoidance is an investment risk, but there are several ways in 
which asset managers can manage this risk.
“As owners of companies, we can actively engage with them to 
encourage proper tax governance and transparent tax practices. 
This includes reporting on issues such as tax policies or where 
companies operate and generate their profits and whether this 
involves known tax havens.
“It also includes having tools in place to identify aggressive tax 
practices and intervene where we observe these. Today’s aggressive 
tax avoidance could be tomorrow’s tax evasion.
“The ultimate objective is not to make companies pay more tax but 
rather to ensure that they pay their fair share.” 5
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Why bad governance i s a r i sk to shareholder 
value
One of the tricky things for businesses focused on the bottom line 
to justify is compliance beyond the regulatory minimum. However, 
meeting and then going above and beyond regulatory requirements 
is arguably the domain of ‘good’ governance. This is the realm of 
systems and processes, foresight and second guessing, assessing 
multiple permutations of what could go wrong now and in the future 
if certain scenarios play out.
One way to understand the commercial value of good governance 
is to think of it as saving significant future costs. If you have good 
governance, not only do you not face fines from the regulator, but 
that oil might not spill, that factory probably won’t collapse. Good 
governance is the invisible and often under-appreciated glue that 
holds a business together and stops cracks appearing.
The following interview with Keith Davies, chief risk and compliance 
officer at Federated Hermes, sheds light on why ESG needs the G, 
and why measuring ESG factors is a risk management issue. He also 
discusses how investee companies can integrate it authentically into 
day-to-day operations and company culture.
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Interview with Kei th Davies, chief r isk 
and compliance of f icer at Federated 
Hermes L imited
do we real ly need ESG to 
run companies wel l?
The adoption of ESG into the management 
of companies is crucial for two reasons. 
Firstly, ESG investment cannot drive 
social and environmental improvement 
unless the investee companies themselves 
make a genuine commitment – and 
take action – to deliver ESG objectives. 
Secondly, embedding ESG into businesses 
is also critical for the long-term success of 
the companies themselves. Firms should not 
see ESG activities as altruistic or some form of 
add-on to good business management but instead 
should realise that delivering in key areas of ESG is 
critical to a firm’s long-term performance
ESG investing recognises this as it seeks to assess all of the factors 
that drive long-term sustainable value in addition to the commercial, 
financial and operational aspects that have always been considered 
when assessing a business. Or put another way, ESG investors seek to 
understand all the risk factors that can detract from long-term value, 
if companies get it wrong. An extreme but obvious example of this 
risk is if a firm is not carbon neutral in say fifteen years, it simply may 
not exist. But there are other ways that achieve positive ESG outcomes 
and also benefit the bottom line. Products increasingly need to be 
aligned to customers’ evolving sustainability expectations. A recent 
survey by Kearney (2021) showed that 44% of 6500 European banking 
customers see ESG issues as an ‘especially important’ factor when 
choosing a bank or financial services provider. So, firms that make 
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ESG an inextricable part of their operations may in fact win more 
business in the long run. 
Indeed, there are many other ways that ESG impacts company 
performance. Firms that take measurable action on sustainability are 
also acutely aware of the positive impact this can have on workforce 
attraction, motivation and retention. An increasing number of 
employees, especially millennials – the largest demographic in today’s 
workforce – are looking to align themselves with companies that look 
beyond short-term money-making and instead adopt a wider purpose 
of improving society; a recent study by Deloitte (2021) found that 44% 
of millennials said that their choice of work and employer is based on 
their personal ethics, with protecting the environment being a top 
concern. This means that companies aligning themselves authenticallyto such values will attract better talent than those that do not.
However, importantly, as we’ve seen throughout the pandemic and 
indications from ‘the Great Resignation’, the attraction drivers are not 
always the same as long-term retention drivers. The same 2021 Deloitte 
survey attributes low financial rewards and concern for long-term 
financial futures, in part, to the great resignation. So to attract and keep 
millennials (and shortly Gen Z) companies must also balance their social 
and environmental purpose with good financial rewards and benefits.
Good ESG practices also open up more opportunities to work with 
like-minded ‘greener’ clients, as more firms expect their supply 
chains and counterparties to have the same ethical standards and 
social and environmental positions as themselves. As a result, ESG-
aligned companies are also likely to get preferential treatment on 
tenders and contracts compared to companies who are not aligned – 
with many examples of firms who experience labour or human rights 
issues in their supply chain losing customers and suppliers. Similarly, 
firms with ESG objectives can access lower lending rates for green 
and sustainability-linked loans and preferential bond terms, as well 
as green insurance, and of course the move to green energy or eco-
efficiency can reduce operating costs. So for all these reasons, firms 
that get ESG right will enhance their long-term value as well as help to 
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improve society and the environment – which means that ESG is a key 
part to firms running well in the long term.
In addition, businesses that authentically shift towards a sustainability-
led strategy before competitors may well gain a competitive advantage 
in the short run from being the first mover. This can boost the firm’s 
brand and standing in the eyes of consumers, suppliers and other 
stakeholders. A good example is Tesla. It is a good product, without a 
doubt, but a key competitive advantage remains from being seen to be 
the first electric car, and run by a CEO who publicly and consistently 
advocates for cleaner transportation globally. Brewdog is another 
example. It gave 20% of profits to charity and offered its premises 
for Covid-19 vaccine rollouts – capturing a significant amount of 
publicity, credit and sales as a result. Also Colgate, whose invention 
and subsequent sharing of the first recyclable toothpaste tubes saw it 
benefit both from a short-term boost and a longer-term ‘halo effect’.
How does ESG f i t in to r i sk?
So firms who get ESG right can maximise the upside opportunity for 
long-term profits. However, if firms get it wrong, not only do they not 
maximise that opportunity, but they can also damage brand and erode 
social licence to operate through a lack of authenticity, stakeholder 
buy-in and trust and a loss of talent, suppliers and sales. 
To this extent, Federated Hermes Limited doesn’t see ESG as a new 
or distinct discipline, but instead as a sub-set of factors that drive the 
long-term value of a company and part of a wider set of performance 
drivers that investors should always be looking at. Previously, many 
asset managers have only looked at traditional and easily quantifiable 
financial and non-financial factors when valuing companies and are 
now looking to incorporate those other ESG drivers of sustainable 
performance that have always been part of the long-term value of 
companies. The key is to make sure that looking at such factors is 
part of a holistic assessment of future performance, rather than a 
mechanical add-on or tick-box approach. 
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How can you be au thent ic?
You don’t have to be the first mover to be authentic. All firms can be 
authentic, whatever they set out to do. If they are not authentic, this 
will become apparent over time. It may not be external stakeholders 
who identify the lack of authenticity – it is usually harder for investors 
or customers to gauge this unless an event hits the media. But 
employees will know, and will vote with their feet and leave, post 
adverse comments on social media or whistleblow.
However, a lack of authenticity will also eventually be found out 
externally through the growing influence of regulation and reporting. 
As ESG takes its place in the spotlight, we are seeing the increasing scope 
and volume of regulations, as well as requirements for transparency 
through disclosures and higher standards to meet and to substantiate, 
so firms will have less wiggle room to fabricate or exaggerate 
intentionally or unknowingly. It is possible that bold statements from 
the past and greenwashing will come back to haunt some.
There are many intangible drivers of a firm’s value that may not have 
been historically obvious as ESG factors. One increasingly important 
social factor is how well a company looks after its employees. This is not 
just in terms of labour rights and industrial relations – although the 
recent events at P&O Ferries and related to construction of stadiums 
for the World Cup in Qatar show how important those factors may be 
for an organisation’s brand and longer-term positioning. Employee 
relations now also – and increasingly since the pandemic – includes 
firms’ approaches to working flexibility and employee wellbeing. 
Another is a firm’s supply chain, where firms are increasingly looking 
to have ethical and sustainability-focussed suppliers to meet customer 
expectations and reinforce their own stated values and purpose. 
Samsung for example has switched suppliers to deal only with green 
parts, whilst Fairtrade coffee has proven successful with consumers 
prepared to pay more to support ethical coffee producers. However, as 
always, opportunity in sustainability and reputational risk are two sides 
of the same coin – with many firms also falling foul of ethical issues in 
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their supply chains; including poor working conditions in Boohoo’s 
Leicester supply chain, modern slavery concerns in suppliers to M&S 
and Uniqlo and PWC’s third-party provider disciplining a receptionist 
for not wearing high heels. 
There is also growing reputational risk downside with regulators as 
their focus on the area increases: if a financial firm greenwashes, it 
essentially mis-sells its sustainability credentials – raising the risk 
of regulatory sanction and wider loss of consumer confidence and 
stakeholder trust. However, if firms get things right in this area, they 
can be held up as an example of good practice by the regulators and 
become known for driving industry standards. So everything that 
could be a risk in this respect is an opportunity, if you get it right.
How do companies choose the i r ESG objec t ives?
It’s very hard to be perfect at everything. It therefore makes sense 
for firms looking at what more they could be doing to only focus on 
a small number of clear and materially relevant objectives, to have 
a chance of getting them all right – as there will always be different 
views and morals and trade-offs to be made. It’s impossible to be all 
things to all investors and stakeholders, and so a company’s board 
and executives have to pick those ESG attributes that align to their 
business strategy and can be embedded in their business plan and 
day-to-day activities. It really matters that the chosen areas of focus are 
embedded right across a business and into all its activities – otherwise 
ESG will likely be treated as just another project and forgotten about 
as soon as the focus on it stops – again preventing the opportunity 
from being fully achieved and raising the risk of reputational issues 
and lack of authenticity down the line. This means that firms really 
need to have a top-down, purpose-led approach to choosing key ESG 
objectives which both align to the expectations of key stakeholders and 
are consistentwith the firm’s values and activities and can therefore 
be delivered effectively, consistently and genuinely. This will require 
firms to evolve their ESG approach from compliance-driven activities 
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undertaken due to emerging regulatory and reporting requirements, 
to a more risk-based and strategy-driven approach.
As well as setting a small number of relevant and achievable objectives, 
it’s important to choose them carefully as there can be significant trade-
offs. Combining environmental and social objectives is arguably the 
most significant challenge, as they are often two sides to the same coin. 
This is why the concept of the ‘just transition’ has been created. This is 
most obvious in countries where jobs, tax revenues, trade and economic 
growth are dependent on the extraction of fossil fuels and other natural 
resources and where short-term economic and social development 
would be compromised by cutting production too quickly. However, 
recent events have shown that it is true in the Western world too, with 
the Russian crisis demonstrating that a rapid reduction in the supply 
of fossil fuels without appropriate green replacements is increasing 
the cost of living and impacting ‘energy poverty’ and several other ‘S’ 
factors. These short-term impacts need to be weighed against the fact 
that not addressing climate change soon will result in significantly more 
material economic and social impacts in the longer term.
Another emerging issue is the problem of ‘green colonialism’, where 
green measures are introduced in the developing world that take 
away indigenous and local communities’ access to land and resources 
and adversely impact the local population. An example of this is tree-
planting to offset carbon, which is taking place in communities in 
tropical and subtropical countries, at the expense of fertile farmland 
and the local community’s ability to feed itself. Closer to home, there 
may be trade-offs between allowing employees to work from home 
and firms’ carbon objectives or inclusion and pay equality targets – 
if those working from home are disadvantaged compared to those 
working in the office (‘proximity bias’). Such trade-offs show that all 
organisations need to look at ESG holistically: there are times when 
achieving one individually laudable objective can adversely impact 
another socially desirable outcome – the ‘E’, ‘S’ and ‘G’ should not be 
compartmentalised – particularly where we need to combat systemic 
problems like climate change and biodiversity and ecosystem loss.
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A final consideration for firms in setting ESG objectives is to monitor 
how stakeholders’ expectations and tolerances on ESG may shift 
over time, as what counts as acceptable standards can change. As 
stakeholders become more aware of, and educated on, ESG issues their 
needs and expectations will change – as the tragic death of George 
Floyd showed. It is therefore crucial that firms be aware of these shifts 
and flex their priorities and targets – whilst not losing authenticity.
So lots for firms to consider in just setting ESG objectives, let alone 
deliver! However, the key to identifying and delivering ESG objectives 
effectively and authentically – including managing trade-offs – is 
to take a holistic approach and adopt strong governance and risk 
management which ensures that all aspects and all stakeholders are 
appropriately considered and delivered and that ESG strategy is 
aligned with the firm’s genuine purpose and values so that the firm 
can – and does – live the values stakeholders expect. In contrast, poor 
governance and decision making over ESG can lead to the wrong 
objectives being chosen and commitments not being authentically 
delivered – including situations where one ESG objective compromises 
another to an unacceptable degree.
Governance is critical to delivering ESG, as it is the set of relationships 
between management, the board, shareholders and stakeholders 
and subsequent policies and procedures through which objectives 
(including sustainability objectives) are set, delivered and monitored. 
Consequently governance, often the forgotten component of ESG, 
actually has a twin impact on achieving ESG objectives and optimising 
long-term performance. Firstly, it is needed to determine and deliver the 
company’s business and objectives by supporting the transparency and 
appropriateness of a company’s operations in relation to its stakeholders. 
Secondly, it is also a key element of ESG on its own – not having the 
appropriate decision-making framework may deter stakeholders 
(especially investors) in its own right, as well as increasing the likelihood 
that the organisation will not have or deliver appropriate ESG and other 
outcomes. To this extent, governance is a set of guardrails that can assist 
or derail the delivery of all ESG objectives and long-term value. 
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The events that crystalised at Yorkshire Cricket Club in 2021 are a good 
example of this. There has been a major short-term financial impact 
and significant long-term damage to the brand of the club because 
the Club’s approach to ethnic players – a social issue – was not given 
sufficient priority, in part due to a governance structure that did not 
appropriately address such issues over time. As a result the scandal not 
only led to significant financial impact (e.g., sponsors withdrawing) 
and loss of employees (with disenfranchised youngsters leaving), but 
highlighted the failures in governance and led to several members of 
the board and senior management losing their jobs.
However, it’s important to recognise that whilst good governance is 
undoubtedly a necessary factor for achieving sustainable performance, 
it may not always be sufficient to prevent issues arising in the modern 
world. A firm can have the right processes in place, but external events 
come along that they could not possibly have foreseen, planned for or 
controlled. The key here is that governance arrangements allow for the 
appropriate response when events materlialise that cannot be stopped.
It is important to be realistic and accept there will always be something that 
a business did not foresee. It’s like the TripAdvisor ratings for hotels: 99 out 
of 100 times they may be good, but there will be one person who has had 
an awful experience. Sometimes, there is disproportionate weight given to 
that disgruntled voice, but it is a totally valid voice that needs to be heard. 
However, firms should not fear such adverse feedback: of course firms should 
seek to deliver the services and values they aspire to, but they really cannot do 
this 100% of the time. They should not be afraid of adverse comments but 
instead have mechanisms and communications that respond to, and learn 
from, such feedback. Indeed, Edelman’s Trust Barometer Report (2021) 
highlighted that investors are starting to view employee activism as a signal 
for a healthy workplace culture, as it helps uncover blind spots and highlight 
the issues that matter most to employees. All the factors show that, in the new 
stakeholder world, firms should not seek to control a never-ending spectrum 
of events and fully mitigate risks and instead look to place greater focus on 
resilience – and their ability to adapt and respond when incidents and failure 
to meet all ESG expectations inevitably happen.
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How i s ESG impor tan t for managing reputa t ional r i sk?
Reputational risk is a material and growing risk for firms. Estimates 
suggests that reputation accounts for at least 25% of a firm’s value, 
and the rise of ESG will likely increase its importance as it puts 
greater emphasis on firms having – and authentically delivering – 
their purposeand meeting stakeholder expectations on social and 
environmental factors. Reputation is, however, not owned by the 
business; it is ultimately owned by stakeholders and driven by their 
perceptions. This means that reputational risks are being amplified 
by the digital economy, a 24/7 news culture, social media and the 
ability of all stakeholders to self-publish. The risk of getting something 
wrong and everyone knowing about it almost instantaneously makes 
reputational risks seem bigger, because any mistake can now be exposed 
and can be circulated instantaneously and widely (‘going viral’). But 
it is also worth remembering about the way people consume social 
media is that people can often move on to the next thing the day after 
tomorrow. Some reputational risks appear to be almost as short lived 
as the initial interest.
One example is the Deepwater Horizon oil spill in the Gulf of Mexico 
in 2010. While textbooks often cite BP’s catastrophic media response 
in case studies, the actual spill is now barely mentioned – even though 
its impact to the environment in that area continues to be felt, it 
does not seem to have had a major impact on BP’s long-term value. 
More recently, there was a scandal surrounding Boohoo and its use 
of low-paid workers to produce its trademark cheap clothes in poor 
working conditions at its supplier factories. Boohoo has since made 
several statements around measures it has put in place, and while this 
prompted greater awareness of the perils of the fast fashion industry 
more widely, Boohoo itself has largely shrugged off the scandal
In these and many other cases, memories appear to be short for those 
not directly affected. Some companies are in good enough standing 
at the time of the negative event that they can bounce back with little 
impact on consumer trust. Although if it happens earlier in a company’s 
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growth journey it may be harder to survive, and of course such issues 
can also resurface if firms suffer additional new events over time.
All of these factors make predicting the impact of ESG and other 
events on a firm’s reputation very hard. Reputation is the sum of the 
perception of all stakeholders, but it is not a 1:1 ratio. The opinion 
and influence of investors is often of more consequence than that of 
other stakeholders, at least in the short term; but the importance of 
different stakeholders varies over time, as do their expectations and 
tolerances for specific ESG issues.
In addition, you can have a bad issue on a big news day and no one 
notices, have small issues that have a seemingly disproportionate 
effect and also have issues from a long time ago that resurface after 
a considerable ‘incubation’ period. Every firm has skeletons in the 
cupboard; a lot depends on the amount of spotlight they are given, 
and for how long. The media undoubtedly plays a role in determining 
the strength and longevity of an issue – as journalists can keep going 
on an issue of reputation, or let it go. However, a strong management 
response and strong communications are also critical – with issues 
often less pronounced for firms that have a good track record for 
being true to their purpose, and who provide appropriate responses 
and communications on the occasions when ESG and other activities 
do go wrong.
What’s the ro le o f the ch ie f r i sk o f f icer when i t comes 
to ESG?
The role of the board is to look at the long-term value of a company 
through the lens of all stakeholders and develop a strategy to optimise 
that value. The purpose of a risk officer is to protect the long-term 
value of a company and enable the board to deliver its strategy in 
a safe and controlled way. This means the chief risk officer’s (CRO) 
role is to identify and manage all risks to the achievement of strategy; 
financial, operational and external risks. As ESG factors can have a 
significant impact on value and are part of a firm’s strategy, they fall 
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into the remit of the risk team – something reinforced by climate 
risk management requirements from the regulators landing on the 
risk officer’s desk to oversee and implement. In some businesses, the 
chief risk officer is now also the ‘chief risk and sustainability officer’. 
Indeed, in looking at the authentic delivery of ESG factors, the CRO is 
increasingly acting as the ‘chief trust officer’ – responsible for checking 
that firms are authentically delivering and accurately reporting on a 
range of ESG risk issues for the business, from diversity and inclusion 
to gender pay gaps. Reputation is built on the principle of trust and 
therefore a key risk for the risk team to oversee is anything that can 
compromise that trust.
Managing the risk of greenwashing also comes into the CRO’s role. 
An over-exaggerated claim to any kind of value commitment might be 
termed ‘purpose-washing’ and could become a major issue – not just 
because of any short-term direct impact but because it could erode the 
trust, reputation and ultimately long-term value of a firm. This also 
highlights the importance of having an effective and genuine corporate 
sustainability communications strategy in place and overseen by risk.
Greenwashing in financial services is probably not the appropriate phrase 
– it sounds less toxic than it really is, because it is ultimately sustainability 
mis-selling. If a firm says to investors it is doing something it is not doing, 
this can amount to regulatory mis-selling and conduct breaches – as firms 
are misrepresenting what customers are buying. The current ambiguity 
of how to define and measure key ESG factors and the vagueness of terms 
such as ‘sustainability’ all lead to the risk that businesses can incorrectly 
report their ESG position and that asset managers can misrepresent the 
ESG/green credentials of funds and offer what Blackrock whistleblower 
Tariq Fancy calls ‘disingenuous promises’ – especially for retail funds. 
Indeed, research group InfluenceMap believed that 421 out of 593 ESG 
equity funds had portfolios that were not Paris-aligned. As a result, risk 
and compliance teams must not only be responsible for monitoring 
that funds meet the factual terms of their mandates, but also check that 
everything else being said to potential and existing customers – and other 
stakeholders – is accurate, clear and consistent.
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C EC H A P T E R 3 : I N V E S T I N G F O R T H E ‘ G ’  G O V E R N A N C E
The value of investments can fall as well as rise and 
you may not get back the original amount invested.
For professional investors only. Issued and approved by Hermes Fund Managers 
Ireland Limited which is authorised and regulated by the Central Bank of Ireland. 
Registered address: 7/8 Upper Mount Street, Dublin 2, DOF2 FT59, Ireland.
We mean
it.
Sustainability.
Discovering the genuine article in sustainable investing is 
different or trendy and you won’t hear any myths here. 
Since our beginnings back in 1983, we’ve been delivering 
Sustainable Wealth Creation, making investing better for all.
sustainability.hermes-investment.com
C H A P T E R 3 : I N V E S T I N G F O R T H E ‘ G ’  G O V E R N A N C E
The value of investments can fall as well as rise and 
you may not get back the original amount invested.
For professional investors only. Issued and approved by Hermes Fund Managers 
Ireland Limited which is authorised and regulated by the Central Bank of Ireland. 
Registered address: 7/8 Upper Mount Street, Dublin 2, DOF2 FT59, Ireland.
We mean
it.
Sustainability.
Discovering the genuine article in sustainable investing is 
different or trendy and you won’t hear any myths here. 
Since our beginnings back in 1983, we’ve been delivering 
Sustainable Wealth Creation, making investing better for all.sustainability.hermes-investment.com
C H A P T E R 3 : I N V E S T I N G F O R T H E ‘ G ’  G O V E R N A N C E
The value of investments can fall as well as rise and 
you may not get back the original amount invested.
For professional investors only. Issued and approved by Hermes Fund Managers 
Ireland Limited which is authorised and regulated by the Central Bank of Ireland. 
Registered address: 7/8 Upper Mount Street, Dublin 2, DOF2 FT59, Ireland.
We mean
it.
Sustainability.
Discovering the genuine article in sustainable investing is 
different or trendy and you won’t hear any myths here. 
Since our beginnings back in 1983, we’ve been delivering 
Sustainable Wealth Creation, making investing better for all.
sustainability.hermes-investment.com
This is a marketing communication.
T H E E S G I N V E S T I N G H A N D B O O K
1 3 4
How impor tan t i s company cu l tu re to governance?
Culture is difficult to define, but its impact on a firm’s performance 
is clear. Culture begins with a company’s purpose and values, which 
then drive belief and behaviour. It therefore drives the way employees 
treat one another and how the firm treats its customers, regulators and 
other stakeholders. It is also a key driver of the quality of governance 
and the way in which a firm manages risks and supports delivery 
within an organisation. Culture is strongly linked to ESG, as it often 
impacts the ability of a firm to embody good social values through 
naturally promoting good treatment of stakeholders. Indeed there is 
a direct impact of good culture on social factors such as mental health, 
diversity and inclusion and the gender pay gap.
Good culture is a kind of positive ‘X’ factor – it affects the way companies 
are perceived by other stakeholders. And it has become increasingly 
important post-Covid. There is now a growing expectation that 
companies should have a proactive culture to both take active steps 
to protect their workforce and to take an ethical stance on big social 
and political issues like #BlackLivesMatter and the war in Ukraine. If 
firms have a good culture, they are starting such debates in a much 
better place as they are likely to have fewer social issues and greater 
employee buy-in to start with. A good culture will also help deliver 
change on key ESG issues, as people need to have belief in the values 
that are behind that change and support it.
For example, if a firm wants to reduce carbon emissions and for staff 
to reduce business travel, then the firm’s culture will influence the 
willingness of staff to make the required behavioural change and 
have more meaningful impact than changes to formal policies and 
mandates. Regardless of whether you are a small firm or a global 
conglomerate, delivering against your values is easier when your 
workforce believes in them. Here again authenticity is key.
Getting cultural cohesion therefore requires both belief in values 
and demonstrated good behaviours. At Federated Hermes Limited, 
we have people who join the company because they subscribe to its 
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values and are committed to promoting sustainability – it means we 
attract workers who want to stay, and can retain them by continually 
displaying such values, with a consistent tone from the top that we are 
‘walking the walk’ on such issues.
However like everything else, culture and values can be a double-edged 
sword if you are not authentic and consistent: as being attractive to 
sustainability-focussed people means that failing to always deliver in 
line with those expectations could quickly create a cultural rift, and 
lead to retention issues and degradation of authenticity quicker than 
in other firms. So again, the key to ESG and culture is appropriately 
balancing the expectations of employees and shareholders (and other 
stakeholders) and then delivering them consistently.
How can companies do jus t ice to the many s ign i f ican t 
governance i ssues they need to address?
There is a large spectrum of E, S and G issues that firms could take a 
position on, and a growing expectation from stakeholders for them 
to do so. However, there is also a risk that firms move between issues 
so quickly that they don’t do justice to them and end up paying lip-
service to them or moving from one topical issue to another.
#BlackLivesMatter is a good example. The issue hasn’t gone away. The 
media focus may have dissipated, but businesses need to continue 
taking action on diversity issues, because they are critical not just 
to societal gain and equity, but to meeting employee expectations, 
securing diversity of thought and boosting firms’ long-term profitability. 
However, it is possible that some firms may lose momentum in this 
area as focus becomes diluted by new issues such as carbon footprint, 
biodiversity and stance on Russia.
Given the wide range of issues that firms could take a stance on, it 
is again critical to choose and focus on those genuinely aligned to 
their values and therefore those they can deliver most meaningfully. 
Focusing on three or four big issues at any one time is the way to do 
T H E E S G I N V E S T I N G H A N D B O O K
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it – showing steady and consistent progress in all areas with forward-
looking plans. All the things a business commits to, it has to deliver 
and report on – on an ongoing basis. Commitments are not just one-
off ethical statements; they often involve signing up for industry codes, 
disclosures and testing, and always require firms to follow through 
authentically and continuously. The risk function also plays a key role 
in overseeing and challenging progress on all key ESG commitments.
As part of the areas to focus on, organisations should, if possible, be 
pre-empting ‘the next big issue’ and preparing for emerging risks and 
trends so that they are not caught by surprise and feeling pressure to 
react once something is in the news. Such forward thinking will also 
remove the risk of a firm being seen as a laggard in such areas and 
indeed could allow firms to gain competitive advantage by being a first 
mover on them.
We have had some degree of focus in the corporate world now on 
human rights, climate change, and diversity and inclusion. We 
have also seen these topics start to be embedded within regulation. 
Organisations should consider their positions on big emerging 
themes that have not necessarily hit the headlines yet; for example, 
biodiversity and antimicrobial resistance. Then any work in these 
areas will not be (and certainly not feel like) a reaction to a hot topic, 
but will be a genuine and embedded position.
If a business had a well-structured ethnic diversity programme in 2019, 
they would be well positioned to make a confident statement about 
#BlackLivesMatter at the time the media focus was on this issue. But 
any time a business is rushing something into place, it can end up 
firefighting and making statements that it cannot deliver on.
Employees are clearly a key and increasingly important group of 
stakeholders – particularly with respect to ‘S’ factors – and firms will 
likely need to set an increasing number of objectives in such areas. 
However even here, the response to employee concerns on an issue has 
to be proportionate. Working from home is a good example of where 
there is a balance between what works for the individual employee 
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and what works for the organisation and other employees as a whole. 
There are business objectives that may differ to employee objectives 
and management will need to weigh up the impact of both on the 
firm’s long-term outlook. For example, there are communal benefits 
to being in the office, which may boost long-term productivity and 
performance – including developing relationships, providing mental 
support, socialising, trainingand learning by osmosis. The impact 
of these on the long-term motivation, engagement and productivity 
of employees and the firm need to be weighed against the personal 
preferences of employees who may, understandably, focus more on 
individual productivity and what is optimal for themselves.
How can you te l l i f good governance i s work ing?
Ultimately, the key to demonstrating good governance is the success of the 
firm and its ability to deliver an appropriate strategy effectively, safely and 
without major issues or events. This includes showing progress on key ESG 
objectives – with clear and consistent reporting against target milestones. 
However in contrast to annual financial reporting, it is important 
to consider time frames when assessing progress against ESG goals 
of any kind. Climate change, whilst needing to start now, will not 
happen overnight – even the most aggressive firms in the ‘race to zero’ 
are targeting 2030. Moreover, achieving social objectives – such as 
genuine ethnic and gender equality – will also take time to secure and 
is harder to tangibly demonstrate. If a business subscribes to getting 
those long-term initiatives right and properly embedded, it means 
that movement towards them and the pay-off for achieving them will 
also only fully emerge over the long term.
That may be fine for stakeholders who have long time frames. However, 
many stakeholders do not have such long-term horizons – activist 
groups want rapid change, disgruntled employees may leave if they 
don’t see sufficiently rapid progress on key issues, and certain customer 
segments may do the same. Even certain investors may not be that 
patient – while many pension policyholders will be interested in long-
T H E E S G I N V E S T I N G H A N D B O O K
1 3 8
term returns, those with a shorter time frame for their investment – 
for example, someone who is within five years of retirement – may 
have preference for short-term financial returns over ‘sustainable 
investments’ that focus on delivering ESG factors to drive longer-term 
financial gains. This is something that ‘life style’ funds will need to 
reflect: people subscribing to pension funds in the ‘accumulation’ 
phase, when they are still working, will be more prepared to invest 
in ESG investments with longer-term pay-offs, than those approach 
the decumulation phase and typically looking to de-risk to sovereign 
and corporate bonds and cash products that look to preserve value 
ahead of longer-term ESG objectives. Products remain to be created 
for those that want to continue to invest in lower-risk products that will 
also help improve the planet.
Are larger f i rms bet ter equipped to deal wi th ESG 
demands than smal ler companies?
Most firms are now facing a number of regulatory and other requirements 
to measure and report ESG metrics – especially those relating to carbon 
emissions and diversity, equity & inclusion. For businesses with more 
staff and resources, this will likely represent a lower cost proportionally 
than for smaller businesses, who may not currently have the teams or 
resources required. So the new reporting standards will likely be most 
costly for smaller businesses, generally speaking.
On the other hand, large firms face other issues that can make it harder 
to make progress on ESG. As mentioned previously, being authentic 
and creating the right culture makes a huge difference to successfully 
delivering other ESG objectives across a firm. However, getting the 
right culture and traction in key issues is often more difficult to instil 
and maintain in larger organisations, particularly businesses that are 
fragmented geographically.
In global businesses, there are different practices in different countries, 
which makes having common standards and ESG objectives more 
difficult. For example, the board structures in Europe differ from 
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those in Asia – in Japan there may not always be truly independent 
members of boards. Global firms therefore face additional issues in 
implementing an ESG approach across the firm – a situation which may 
increase as geo-political pressures rise and different locations within 
the firm have different views on certain jurisdictions and regimes – as 
shown by HSBC having to navigate growing political tension between 
the US and China. 
However, generally speaking, larger companies tend to get better 
ESG ratings, because they are better able to report accurately and 
often, as well as meet transparency requirements. They effectively get 
higher scores just for having more and better documents published. 
This resource advantage and ‘transparency bias’ may do smaller 
companies a disservice when it comes to proving good governance, 
as well as measuring other ESG factors. Smaller companies may well 
be more authentically committed to ESG, but simply cannot produce 
the same level of materials for the ratings companies.
On the other hand, younger businesses that are perhaps at the 
venture capital rather than listed stage have the advantage of being 
able to define and embed their purpose values and ESG positioning 
right from the very beginning, embedding that in a relatively small 
workforce at the outset. Larger, established companies that are only 
now articulating their purpose and values, from a stakeholder rather 
than shareholder-only perspective, must usually make the required 
culture and ESG shifts retrospectively. Once a company has reached 
a certain scale, it becomes much harder to implement new ESG 
objectives authentically and can feel, as one responsible investment 
professional said: “like turning a juggernaut”.
However, for all companies – large or small, established or start-
ups – it will be increasingly important to embrace sustainability, as 
authentically embedding ESG objectives is critical for the long-term 
success of all companies. It is needed for firms to deliver their purpose, 
meet the needs of all stakeholders and thereby increase the long-term 
value of the company along with delivering environment and social 
enhancements. ●
T H E E S G I N V E S T I N G H A N D B O O K
1 4 0
ESG sector focus : banking
“The first thing you need to know about Goldman Sachs is that 
it’s everywhere. The world’s most powerful investment bank is 
a great vampire squid wrapped around the face of humanity, 
relentlessly jamming its blood funnel into anything that smells 
like money.”
Matt Taibbi, journalist
The banking sector is, indirectly, every sector. As the ‘vampire squid’ 
metaphor that defined impressions of Goldman Sachs in the aftermath 
of the Global Financial Crisis (GFC) aptly visualised, banking – in 
issuing finance to all other parts of the economy – is as diverse from an 
ESG perspective as the global economy. The collapse of the banking 
system in 2007/8 and ensuing financial crisis emphasised the painful 
dependence on banks of everything else we depend on. Whether you 
see banks as vampire squids or (perhaps more benignly) as trees with 
roots and branches off in all directions, the point is, through loans, 
accounts and investments, their influence is everywhere.
So as investors with one eye on ESG, wondering whether to invest in 
banks, how do they rank? Or if you already have banking stocks in your 
investment portfolio, should you feel encouraged?
Generally speaking, banks have been viewed unfavourably from an 
ESG perspective. They caused the GFC, after all, through being ‘too 
big to fail’, and the world is still reeling from their rescue through 
taxpayer-funded bailouts and successive years of quantitative easing. 
Over the last 14 years austerity policies, asset price inflation through 
made-up rescue money being pumped into markets, alongside ultra 
low interest rates have stoked housing booms, a crypto currency boom 
and an increase in wealth inequality globally, as countless academic 
studies havesuggested.
Not only was the banking sector responsible for the GFC, it also props 
up the fossil fuel industry. The world’s biggest 60 banks have provided 
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$3.8trn of financing for fossil fuel companies since the Paris climate 
deal in 2015, according to the Banking on Climate Chaos 2021 report.6
Figure 20 shows the banks that lent the most to fossil fuels between 
2016 and 2020.
Figure 20: Banks that lent most to fossil fuel companies 
2016 – 2020
JPMorGAn CHASE
Citi 
WEllS FArGo
BAnK oF AMEriCA
rBC
MuFG 
BArClAYS
MiZuHo 
BnP PAriBAS
td 
SCotiABAnK
MorGAn StAnlEY
JPMorGAn 
CHASE lEAdS 
BY 33%
$100B $150B $200B $250B $300B $350B
$317B
$238B
$223B
$199B
$148B
$146B
$124B
$121B
$121B
$114B
$111B
$160B
Source: Banking on Climate Chaos
The report also published rankings of banks’ policies on restricting 
fossil fuel financing – a forward-looking measure of future commitment 
and transparency (Figure 21).
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 21: Policy scores: fossil fuels
Bank Score 
out of 
200
50 100 150 200
Source: Banking on Climate Chaos
As much as banks have been responsible for environmental and social 
harm, the sector also wields immense power for good.
As the World Bank argues:
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“Financial stability, both globally and within countries, generates jobs 
and improves productivity. It gives people confidence to invest and 
save money. Robust banking systems and capital markets efficiently 
flow funds toward their most productive uses, help governments 
raise investment capital, maintain financial safety nets and speed 
payments securely across borders.
“Good access to finance improves a country’s overall welfare because 
it enables people to thrive and better manage their needs, expand 
their opportunities and improve their living standards. When 
people are financially included, it’s easier to manage consumption, 
payments and savings, access better housing, healthcare and 
education, start a small business, and use insurance products to 
protect themselves from shocks. Finance also helps level the playing 
field – making significant wealth and connections less relevant.
“Capital markets are becoming essential to financing infrastructure 
such as roads, power plants, schools, hospitals and houses and to 
help manage unforeseeable risk. They are increasingly relevant for 
the Sustainable Development Goals as reaching many of them will 
require long-term financing that traditional funding sources won’t 
be able to cover. Attracting private sector finance and investment 
to help cover the huge financing gaps is necessary to help the world 
meet these global goals.”
This power and ability through investment and lending decisions 
to change the global flow of capital from destructive to sustainable 
businesses is why banks have been the focus for much of the most 
stringent regulation to come out of climate policymakers to date.
There’s no point beating around the bush: most of the progress made 
by banks both now and in the months to come will have come about as 
a result of more stringent regulations and guidelines from voluntary 
organisations. More transparency should breed better behaviour. 
Regulation and reporting, at European, Scandinavian, US and UK 
banks, at least, are already baked into banking and are the way things 
are done, so this work starts from a solid base.
T H E E S G I N V E S T I N G H A N D B O O K
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Globally though, the ESG picture in the banking industry is more 
mixed. Sustainalytics places 79 banks in its ‘severe’ ESG risk category 
and these are largely banks headquartered in Africa, India, Russia, 
China, Brazil and the Middle East, although some, it should be noted, 
are listed in the US.
Only 23 banks are listed in Sustainalytics highest ESG scoring category 
of ‘negligible’ risk and these are mostly located in Europe and 
Scandinavia, with the Co-operative Bank in the UK the only UK-based 
institution in this category. Sustainalytics also includes building 
societies among its bank rankings and it is interesting to note that some 
of the UK’s most well-known building societies, which are mutually-
owned organisations rather than PLCs, are in the ‘low risk’ category, 
including Nationwide, Yorkshire and Principality Building Societies.
 See Chapter 6 for more on regulatory changes affecting banks.
There is also work to be done on the products banks offer to 
regular customers.
A report by TLT Research, ‘Safety in numbers: levelling the playing 
field for green finance’ showed that 39% of financial services firms 
have launched green finance products or offerings, with this expected 
to increase by 53% within 12 months. By 2024, all financial services 
firms are expected to have green offerings.7
31 UK banks offered green mortgages at the time of writing, according 
to the Green Finance Institute, with 18 launched in 2021 alone. 
Barclays was the first major high street bank to offer a green mortgage 
in 2018. Uptake of these deals remains low, but with the publication of 
the Green Finance Roadmap last year and growing awareness among 
homeowners and landlords of the need to decarbonise their homes, 
demand is expected to rise.
Some sustainability experts point to the risk that offering green 
mortgages and other products could provide a marketing smokescreen 
for banks that are heavily invested in fossil fuels to present a green 
front end while the back end is still powering a dirty world. Indeed, 
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some evidence points to a more significant gap between ‘saying and 
doing’ in banking than in other sectors.
A June 2021 ESG index of UK banks by Alva, the market intelligence 
group, found that many of the UK’s largest banks ranked near the 
bottom of the sector index.8 Alva put this down to:
“the presence of a diverse array of ESG challenges, contributing 
to a negative sector average score of −7. HSBC, Lloyds, Barclays, 
NatWest and Standard Chartered collectively generate 65% of 
the share of voice but average an ESG score of −40, far below the 
sector average. This reflects the natural disadvantage of limited 
adaptability when compared to less established competitors, while 
themes such as branch closures and global governance issues – 
particularly involving China – stem from a combination of large 
scale and a rapidly changing banking landscape.”
 The study found that banks were marked down for business ethics 
and highlighted the criminal court case against NatWest over 
money laundering.
Despite the ongoing strong connections of some banks to the fossil 
fuels industry, investing in banks presents a significant opportunity for 
sustainable investors. The difficulty may be in deciding which banks 
are ‘doing’ as well as ‘saying’, as many of the official rankings of banks 
by ratings providers disagree.
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 22: Alva’s Materiality Index for banks, June 2021
1st - Lending Practices
▲	virgin Money launches sustainability-linked loans for uK firms.
▲	the uK’s largest banks are planning to launch a wave of climate-change products and to
tighten lending standards
2nd - Diversity & Inclusion
▲	numerous banks join the valuable 500 initiative, putting disability on the business agenda
▲	lloyds becomes the first major uK bank to disclose its black pay gap
▼	the number of women at uK banks shrank by 3% in 2020
3rd - Data Security
▼	Big banks are found to have lax online security flaws putting customers at risk and open to 
scammers
▲	nationwide partners with the new Swindon iot to recruit apprentices in cybersecurity
4th - ESG Investing
▲	investec is praised for work in tackling environmental issues after winning Clean City Awards
▼	EthicalConsumer names Barclays, HSBC, lloyds, natwest, Santander and tSB as “among the
big names that continue to provide finance for or invest in fossil fuel companies”.
5th - Financial Inclusion
▼	the FCA calls for banks to reconsider branch closures, fearing the vulnerable will be left without 
access to services
▲	HSBC launches its no Fixed Address service, allowing homeless people to open accounts
6th - Systemic Risk Management
▲	Barclays sets aside almost £5bn to cover bad loans that may turn toxic due to the pandemic
▼	oneSavings Bank delays results after being the victim of a suspected £28.6m fraud by a 
corporate customer
7th - Business Ethics
▼	Court finds Aldermore guilty of forging a signature during bankruptcy trial
▼	natWest faces criminal case over allegedly failing to comply with money laundering rules
Source: www.alva-group.com/esg-intelligence-solution
Figure 23: Alva’s UK bank rankings, 2021
Company
Paragon Bank
Shawbrook Bank
virgin Money
investec
Sainsbury’s Bank
Schroders
Co-operative Bank
nationwide
Metro Bank
Close Brothers
SECtor AvErAGE
Barclays
Aldermore Bank
Standard Chartered
lloyds Banking Group
HSBC
tSB
tesco Bank
oneSavings Bank
Santander
natWest Group
Rank
1
2
3
4=
4=
6
7
8
9
10
---
11
12
13
14
15
16
17
18
19
20
ESG Score*
58
42
37
31
31
21
19
18
14
12
−7
−24
−33
−38
−40
−41
−46
−47
−49
−50
−59
PTD Score**
29
21
7
20
16
34
8
38
7
16
−4
−7
−16
−29
−22
−52
−45
−23
−24
−31
−27
Source: www.alva-group.com/esg-intelligence-solution
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Sustainalytics ratings of UK high street banks places most in either low 
or medium risk categories.
uK banks wi th low ESG r i sk (Sus ta ina ly t ics 
2021 ra t ings)
• Co-operative Bank
• Investec
• NatWest
• Paragon
uK banks wi th medium ESG r i sk (Sus ta ina ly t ics 
2021 ra t ings)
• Barclays
• HSBC
• Lloyds
• Standard Chartered
• Virgin Money
Key oppor tun i t ies for banks in ESG
• Alleviating poverty and shared prosperity. 
• Green bonds – renewable energy lending. 
• Other green financial products for people including green 
mortgages tied to the energy efficiency of homes.
Key r i sks for banks in ESG
• Legacy fossil fuels lending – long dated loans. 
• Money laundering and financial crime.
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• Poor household lending and credit decision-making and 
case handling.
Fur ther resources
Banktrack.org, the NGO that monitors banks’ financing activities 
globally, is an unrivalled resource for details on the policies and 
activities of individual banks: www.banktrack.org.
The Global Alliance for Banking on Values is an organisation 
representing a number of banks that adhere to the principles of 
values-based banking: www.gabv.org.
Regional focus : Uni ted States
Opportunities for ESG investing vary dramatically depending on 
where in the world you are investing. Countries are at different stages 
of development and have different economic and policy objectives. 
While events such as COP26 and initiatives such as the UN PRI and 
the Sustainable Development Goals are attempts to marshal disparate 
countries around common causes, there are important divisions.
Not all countries represent the opportunity (or otherwise) you might 
expect. It doesn’t follow, for instance, that a relatively poorly developed 
country favours continued fossil fuel development over renewable 
energy. Some, including some African states, are skipping over the 
full rollout of an oil and gas-based infrastructure and going straight 
for renewable power.
Here, we focus on how the US is adapting to ESG requirements across 
its economy.
over v iew
As the most developed economy in the world, you’d expect the US 
would be a leading light in the ESG field. Not so. While there is a 
thriving ESG ratings industry and a wealth of investment options for 
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sustainable investments, progress among companies in the land of the 
free is often left wanting.
Stakeholder rather than shareholder capitalism is arguably not the 
approach associated with the US economy, which evolved according to 
many of the principles of Milton Friedman, the American economist, 
who wrote in Capitalism and Freedom: “There is one and only one social 
responsibility of business – to use its resources and engage in activities 
designed to increase its profits so long as it stays within the rules of the 
game, which is to say, engages in open and free competition without 
deception or fraud.”9
The scope for ESG within this doctrine would be to create ‘the rules of 
the game’. ‘Without deception and fraud’ is arguably the lowest rung 
of the governance ladder, although does give something to work on.
That’s not to say ESG isn’t happening in America. Some of the most 
impressive ESG-focused organisations started the bandwagon rolling 
in the US long before others hopped on. Triple Pundit, Reap What You 
Sow, Soul Investor, 350.org and B Corps are some of the organisations 
and initiatives that have been leading the charge for the sustainable 
business and investing movement in the US over recent years. There 
are hundreds of others.
It’s fair to say the US is behind in a number of key areas. In terms of 
where it stands on progress towards net zero, the US – according to 
the WWF and Ninety One Climate and Nature Sovereign Index – has: 
“very low levels of aggregate energy and carbon efficiency, [which] pose 
major long-term transition risks, with the tax base less environmentally 
aligned than any other developed market.”10
On gender representation in the workplace, the US remains the only 
OECD country without a federally regulated mandate on factors such 
as parental leave. As the Bloomberg Gender Equality Insights report 
authors point out:
“The Biden Administration has introduced an adjustment of 
priorities towards a more sustainable future. Ongoing conversations 
T H E E S G I N V E S T I N G H A N D B O O K
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at the Securities Exchange Commission (SEC), for example, 
indicate a promising approach towards regulation on governance 
board/diversity standards.”
The $1trn US Infrastructure Bill, passed by the Biden administration 
in November 2021, is an area of promise from an ESG point of view. It 
commits to: “rebuild America’s roads, bridges and rails, expand access 
to clean drinking water, ensure every American has access to high-
speed internet, tackle the climate crisis, advance environmental justice, 
and invest in communities that have too often been left behind”.
The investment will focus on upgrading the power infrastructure, 
installing electric vehicle charging points, rail improvements and 
climate mitigation measures, among other areas.
US labour laws have long been an area for improvement. Compared 
with international counterparts, workers’ rights in America are not 
well represented. In 2021, a survey of unions by the International Trade 
Union Confederation (ITUC) found that among all the developed 
nations in the world, the US was the worst when it came to workers’ 
rights. The report put the US in its ‘4th category’, for a systematic 
violation of rights. Lack of holidays, lack of redundancy pay and lack 
of universal healthcare were among the reasons.
A recent ITUC campaign focused on Amazon called ‘Make Amazon 
Pay’, stated that:
“Amazon made so much money during the pandemic it could pay 
every worker $690,000 and still be as rich as at the start of the 
pandemic. Amazon makes this money by exploiting its workers, 
fighting their right to organise unions to improve their working 
lives, damaging the environment, and not paying its fair share of 
tax that provides the services we all rely on.”
Meanwhile, a slightly ‘against-the-grain’ attitude towards tax avoidance 
in the US: a 2019 paper in the journal Accounting and Business Research 
by Lynne Oates and PenelopeTuck found that there has been a 
general, global recalibration of tax avoidance measures so that they 
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
are becoming viewed almost as dimly as illegal tax evasion, but in the 
US there are signs of a culture of respect towards tax avoidance.11 
“In the case of the US, for example, Bank (2017) explores the 
question of when tax avoidance became ‘respectable’ and 
concludes that a shift occurred after WWII observing that what 
is remarkable in modern times is that the public reaction to 
the various ‘scandals’ revealed in the media is muted; they are 
viewed as relatively non-scandalous. The US experience therefore 
appears to be different to that in Europe in particular in that anti-
tax avoidance campaigns by civil society activists and NGOs have 
had less traction there. This is similarly reflected in the stance 
of the US towards BEPS; largely disengagement and pursuit of 
an independent programme of reform of international tax rules 
within the US tax code.”
When it comes to ESG specifically, the US may be behind Europe in 
some areas, but expectations are that it is about to catch up and looks 
set to get particularly tough on greenwash.
According to the US National Law Review:
“A recent wave of greenwashing lawsuits against the cosmetics 
industry drew the attention of many in the corporate, financial and 
insurance sectors. Attacks on corporate marketing and language 
used to allegedly deceive consumers will take on a much bigger 
life in 2022, not only due to our prediction that such lawsuits will 
increase, but also from Securities & Exchange Commission (SEC) 
investigations and penalties related to greenwashing. 2022 is sure to 
see an intense uptick in activity focused on greenwashing and the 
SEC is going to be the agency to lead that charge. Companies of all 
types that are advertising, marketing, drafting ESG statements, or 
disclosing information as required to the SEC must pay extremely 
close attention to the language used in all of these types of 
documents, or else run the risk of SEC scrutiny.”12
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The SEC formed the Climate and Environmental, Social and 
Governance Task Force (ESG Task Force) in March 2021. The ESG 
Task Force was created to investigate ESG violations amid rapid growth 
in demand for ESG investments and to ensure that ESG activity is 
done “properly, transparently and accurately”.13 2022 is expected to be 
its year of enforcement action.
The SEC also invited public comments on climate change disclosures.
Meanwhile the Federal Trade Commission (FTC) published a set 
of Green Guides, to help companies avoid making deceptive claims 
about environmental benefits of products and services.14
A Risk Alert published by the SEC in April 2021 identified a number of 
issues in the sale of ESG investments, including:
• “Portfolio management practices were inconsistent with disclosures 
about ESG approaches.”
• “Controls were inadequate to maintain, monitor, and update clients’ 
ESG-related investing guidelines, mandates, and restrictions.”
• “Proxy voting may have been inconsistent with advisors’ stated 
approaches.”
• “Unsubstantiated or otherwise potentially misleading claims 
regarding ESG approaches.”
• “Inadequate controls to ensure that ESG-related disclosures and 
marketing are consistent with the firm’s practices.”
• “Compliance programs did not adequately address relevant 
ESG issues.”
• ESG compliance personnel had limited knowledge of relevant 
ESG-investment analysis or oversight over ESG-related disclosures 
and marketing decisions.
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
It also identified some good practice:
• “Disclosures that were clear, precise and tailored to firms’ specific 
approaches to ESG investing, and which aligned with the firms’ 
actual practices.”
• “ESG factors that could be considered alongside many other factors”, 
and “explanations regarding how investments were evaluated using 
goals established under global ESG frameworks.”
• “Policies and procedures that addressed ESG investing and covered 
key aspects of the firms’ relevant practices.”
• “Compliance personnel that are knowledgeable about the firms’ 
specific ESG-related practices.”
Greenwash or not, the difference that ESG firms are making to the 
wider world in the US may be up for debate. A September 2021 UTIL 
report analysed US ESG funds against the UN SDGs and found that 
while sectors involved in the prosperity-focused categories of the SDGs 
did relatively well in the US, those aiming to improve the environment 
scored poorly.
‘P ’ i s for 
per formance
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 24: UTIL report on US ESG funds against UN SDGs
total fund universe
Source: util
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
Within the sustainable fund universe, the scores were marginally 
(though not impressively) higher
Figure 25: UTIL report on sustainable fund universe
Source: util
T H E E S G I N V E S T I N G H A N D B O O K
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Tech – an ESG smokescreen in the US?
A noteworthy and relatively controversial contribution to ESG-focused 
funds has been the appearance of large technology companies, such as 
Apple, Google and Microsoft, which do not have a clearly discernible 
environmental or social focus and might be better described as 
‘neutral’ in many funds with an ESG label.
Arguably, progress within each of the US tech giants on renewable 
energy and waste reduction make them worthy of their ESG inclusion.
Apple is worthy of special mention, as its value recently passed $3trn. It has 
strong environmental credentials in terms of its commitment to be 100% 
carbon neutral across its entire business by 2030. However it has also been 
criticised for poor working practices, particularly among those working 
in retail, support and sales, with complaints about conditions and pay.
Tesla – the poster child of profits with principles, also requires special 
mention as the increase in the value of its share price has helped to drive 
growth in sustainable funds as a whole over the last few years (Figure 26).
Figure 26: Tesla Inc
Source:Google finance 
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
However, the US is not solely made up of multi-trillion dollar companies.
The following companies were ranked by Morningstar-owned 
Sustainalytics as best for ESG scores in the US in 2022. Alphabet (the 
holding company of Google) Apple and Tesla are nowhere to be seen, 
although four of the top ten are technology firms.
Figure 27: Sustainalytics ESG rankings
Company Name
Accenture PlC
Adobe inc
Salesforce.com inc
the Home depot inc 
Experian PlC
lowe’s Companies inc 
Moody’s Corporation
MSCi inc
S&P Global inc 
Ansys inc 
Microsoft Corp 
thermo Fisher Scientific inc
taiwan Semiconductor Manufacturing Co ltd 
Waste Management inc 
CME Group inc
Autodesk inc
Servicenow inc 
PepsiCo inc 
visa inc 
Canadian national railway Co 
Jack Henry & Associates inc 
Berkshire Hathaway inc 
Agilent technologies inc
intuit inc
intercontinental Exchange inc 
t. rowe Price Group inc
nike inc
diageo PlC 
dassault Systemes SE 
novartis AG
Canadian Pacific railway ltd
Mastercard inc
ABB ltd
Guidewire Software inc
Zoetis inc
royal Bank of Canada 
Waters Corp 
Expeditors international of Washington inc
tyler technologies inc 
Amgen inc 
veeva Systems inc 
Aspen technology inc
rockwell Automation inc
landstar System inc
Waste Connections inc
tradeweb Markets inc
Ticker
ACn
AdBE
CrM
Hd
ExPGY
loW
MCo
MSCi
SPGi
AnSS
MSFt
tMo
tSM
WM
СМЕ
AdSK
noW
PEP
v
Cni
JKHY
BrK.B
A
intu
iCE
troW
nKE
dEo
dAStY
nvS
CP
MA
ABB
GWrE
ZtS
rY
WAt
ExPd
tYl
AMGn
vEEv
AZPn
roK
lStr
WCn
tW
Sustainalytics ESG Risk Rating Score
9.45
10.78
11.21 
11.45
11.62
11.66
11.66
12.41
12.6913.16
13.26
14.24
14.41
14.53
14.55
15.45
15.73
16.01
16.06
16.15
16.31
16.35
16.45
16.50
16.56
16.73
16.80
16.84
16.98
17.01
17.08
17.23
17.80
18.12
18.18
18.26
18.29
18.57
19.41
19.42
19.47 
19.52
19.68
19.90
19.95
20.00
Source: Sustainalytics
T H E E S G I N V E S T I N G H A N D B O O K
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Singled out for special mention by Sustainalytics were the following 
three US companies:
Accenture (ACn)
Sustainalytics said the consultancy firm had the lowest ESG risk rating 
of all the high quality companies on its list and rated its overall risk 
management as strong. 
Adobe (AdBE)
Adobe, developer of Photoshop, Illustrator and the ‘creative cloud’, 
has a strong ESG Risk Management rating from Sustainalytics. It also 
has strong employee relations and reached gender pay parity in 2018.
Salesforce.com (CrM)
Salesforce.com introduced automated software applications that 
could be accessed through a web browser. Processes on security are 
strong and Sustainalytics rated employee relations risk management 
as above average.
uS ESG s t rengths
• Electric vehicles
• Healthcare and pharmaceuticals
• Technology
uS ESG weaknesses
• Food consumption and production
• Oil and gas
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C H A P t E r 3 : i n v E S t i n G F o r t H E ‘ G ’ – G o v E r n A n C E
C
H
A
P
TE
R
 4
‘P ’ i s for 
Per formance
T H E E S G I N V E S T I N G H A N D B O O K
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t he impact of taking ESG factors into account on the financial 
performance of an investee company or an ESG-focused fund is 
a highly debated topic.
For many years, ethical investing was considered a sure-fire way to 
limit your prospects of generating strong returns. In applying negative 
screens and removing certain sectors, the universe of companies 
available to ethical investors was much narrower.
As Julia Groves, an ESG investment expert, puts it:
“Those of us who’ve been investing for 20 years remember the first 
round of so-called ethical and impact funds. Their selling point was 
that the return on your investment was more than just financial, it 
was having wider societal benefits at the same time. Unfortunately, 
the experience in reality was either that investment didn’t actually 
do anything useful for society, or the returns didn’t happen. And 
then this led to this long protracted period of everyone thinking 
it was either one or the other, you couldn’t have both. If it was 
going to be ethical, you had to compromise your financial returns. 
Fortunately, we have moved on from this binary view now.”
What evidence do we have that ESG has any impact on financial 
returns? Given that ESG is still relatively immature as a theme, is the 
evidence good enough to make confident long-term predictions about 
the impact of ESG on financial returns? If it does have an impact, is 
the performance only better over the long term? Could it be better 
in the short term, too? What does the financial performance of ESG-
related investments depend on? Have they just done well because this 
is a trend? Or because of huge underlying, irreversible tectonic shifts 
in the global economy and the energy it runs on? Have these funds 
done well just because they don’t include fossil fuels, which have had 
T H E E S G I N V E S T I N G H A N D B O O K
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a rough ride lately? Or because ESG funds are invested in certain 
sectors, such as technology, that have done well anyway, regardless of 
their ESG credentials?
Some argue that good ESG performance helps to remove risk, which 
helps to insulate firms from shocks that can cause declines in value. 
Proponents of the view that good ESG equals good financial performance 
over the long run also believe that being a good company enhances 
the brand, which brings in more customers. Finally, if structural shifts 
in global capital flow are prioritising ESG, then these companies will 
attract more investment, which they can use to continue to invest in 
more beneficial activities, perpetuating a virtuous circle of returns and 
assets, producing more returns and more ESG-friendly assets.
Other experts argue that ESG detracts from a company’s core focus, 
creates reams of additional, costly work through transparency and 
reporting requirements and adds little risk protection beyond a 
company being well run, which should happen even without ESG 
considerations being so-defined or front of mind. After all, even the 
best ESG performance in the world doesn’t protect a company 100% 
from ‘one bad apple’, which is all it can take to spoil the bunch.
Thankfully, we do now have some years of data rather than just 
hypotheses to go on.
The difficulty is that it is hard to differentiate whether the good 
performance is down to an ESG strategy, general market trends or 
simply the flood of money looking for a stakeholder-pleasing home that 
ticks all the ESG boxes, rather than the virtues of the underlying assets.
Does ESG lead to bet ter 
per formance?
Investments that rank highly for ESG, whether in equity or bond 
markets, have enjoyed a few years in the sun. This has led to claims 
that adopting an ESG strategy fundamentally leads to improved 
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C H A P t E r 4 : ‘ P ’ i S F o r P E r F o r M A n C E
performance. However, there is a lot of data to dissect, arguably over 
many more years, before this can be verified. The sometimes cyclical 
nature of global stock markets, together with popularity shifts in 
thematic trends and halo effects for ESG from rising tides in other 
sectors, such as technology, means that it is possible that absolute 
verification never emerges.
Looking for absolute answers is also a bit like chasing a moving 
target. ESG standards and criteria are developing rapidly and so is 
the maturity of the technology and sectors that underpin much of 
that. Old ESG is constantly giving way to new, ESG 2.0. So to some 
extent, the answer to the performance question is always changing, 
depending on the point in time.
It also depends on the degree of transformation of those sectors and 
companies that are currently non-ESG, like fossil fuels. If, under the 
weight of pressure from regulation and global policies, fossil fuel 
companies go the way of Kodak then this will have a clear impact on 
the valuations of companies focused on alternative energy sources 
from the very beginning. On the other hand, if fossil fuel companies 
successfully transform their business models away from fossil fuels and 
towards renewable energy with all their power and might, this could 
potentially dampen the valuations of the renewable pioneers.
The geography of the ESG being discussed also matters. A recent 
study by Investment Metrics for FT Adviser – ‘Are ESG stocks really 
outperforming?’ – suggested that the outperformance of funds rated 
highly for ESG was clear when considering European ESG funds, 
after having removed sector- and asset-specific biases, but was not 
clear in the US, where much ESG investment has been in big US tech 
companies and where the financial performance has largely been 
a result of the performance of the underlying asset rather than as 
a result of US tech companies’ commitments to ESG.1 But even in 
the case of the European ESG stocks outperformance, there was no 
way of identifying whether the outperformance was just a function 
of the earlier popularity of ESG investing and incorporation of ESG 
T H E E S G I N V E S T I N G H A N D B O O K
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metrics, which Investment Metrics suggested could simply have been 
ahead of the US.
A number of academic studies now suggest that after several years of 
strong financial returns, ESG outperformance – probably a result of 
its popularity and newness as a differentiated strategy – is becoming 
less pronounced.
Some have gone fully back around the circle and are now managing 
expectations. As Alex Edman puts it quite matter-of-factly in Grow 
The Pie, “the average responding investing fund underperforms”.2 
Meanwhile Greg Davies, head of behavioural finance at OxfordRisk, 
indicates that there is a moral imperative to make it clear once more 
that investing in ESG or impact is more likely than not to lead to lower 
returns: “It should not be a surprise if, in the long term, ESG investing 
does come at some cost to investors”, he told the Financial Times; 
“Paying a higher price for the same profits means lower investor 
returns. This is true of any assets that are ‘popular’”.3
Is there an ESG bubble?
Although the evidence suggests a recent softening of returns among 
ESG investments, that doesn’t necessarily mean there has been an ESG 
bubble and that that bubble is going to pop, something a number of 
market watchers have suggested may be a threat. It is true, there has 
been something of a rush of money into ESG-friendly assets in the last 
two years especially, partly driven by incoming regulatory and policy 
factors but also partly a consequence of the penny dropping en masse 
that ESG concerns can affect company valuations and so belong in the 
stock market. Added to this, the heightened climate awareness among 
consumers, thanks to Greta’s climate strikes and David Attenborough’s 
appeals in Blue Planet, among other influences that have caused a 
change in attitudes. As climate science denial, like flat earth theories, 
has rapidly been eradicated from discourse, an acceptance that ESG 
matters has simultaneously entered the investment mainstream. “The 
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C H A P t E r 4 : ‘ P ’ i S F o r P E r F o r M A n C E
Overton window has opened”, said Seb Beloe, head of research at 
WHEB Asset Management, the positive impact specialist, at the launch 
of its impact report in 2019. And in flew everyone.
What goes up must, eventually, come down. But a fall doesn’t necessarily 
need to be as dramatic as the rise that preceded it. The softening may 
be a consequence of a less dramatic, natural inclination of investors 
to move away from the relatively high asset prices associated with the 
highest-rated ESG equities now.
It looks as though ESG, as with other investment themes, may be set to 
experience lows as well as highs. Whether the theory of the virtuous 
circle of financial, environmental and social returns will bear out 
over the very long term is yet to be seen. Evidence of a softening of 
ESG-related returns could be viewed as a positive: it has arrived, it is 
at the investment party, albeit no longer the most novel guest. It has 
certainly become well acquainted with more people in the room.
A strong, but perhaps more subtle argument around the influence of 
ESG on returns is not that it fundamentally boosts them, but that good 
ESG strategies can prevent them from periodically and even terminally 
nose-diving as a result of ESG failures. This argument, that ESG can 
protect against material financial risks to profits because it prevents 
and mitigates harmful externalities through its focus on proper 
conduct and process is convincing and common sense, but difficult to 
assess – how do you know what risks might have borne out and what 
impact they might have had, if they never end up happening?
The carbon bubble , s t randed assets and 
prevent ion s t ra tegies
Dealing in unknowns is a difficult area for asset managers who 
traditionally look at past performance when making forecasts. The 
infinite pool of possible future events is a tricky sell for evidence-based 
investors. Nevertheless, one hypothesis is particularly compelling for 
investors: the potential issue of stranded assets could be the biggest 
T H E E S G I N V E S T I N G H A N D B O O K
1 6 6
and worst example of what not taking ESG factors into proper 
consideration can do for fossil fuel companies. As Julia Groves says:
“Whether ESG has a material impact on returns may be revealed 
through urgent responses to climate change. People like the 
Financial Stability Board, the international body, and the Taskforce 
for Climate-Related Financial Disclosures, are looking at how we 
can avoid financial crises ever happening again. But this time, the 
issue isn’t subprime mortgages; the risk is of stranded assets on a 
balance sheet.”
In the meantime, as the threat of stranded assets becoming a reality 
brews, it might be wise for investors to temper any expectations of 
high profits with principles. It’s certainly not a given that ESG leads 
to lower overall returns, but nor is it a given that it will always lead to 
higher returns.
As with any investment strategy, a lot may come down to timing and 
timeframes. Over the long term, it makes sense that a stock that takes 
little account of ESG factors will be exposed to a risk that could derail 
returns, although it could also recover from this over the long term. 
In the short term, it makes sense that companies that do not spend 
much time and energy on ESG concerns but instead focus on the 
bottom line and profit maximisation, will do well financially, whereas 
a company taking time and effort to address its wider impact on the 
planet and society may deliver lower profits.
In February 2021 NYU Stern Center for Sustainable Business 
published a report that attempted to answer the question of financial 
performance once and for all, by analysing more than 1,000 research 
papers published between 2015 and 2020.4 Overall, it found a positive 
correlation between ESG and returns for businesses and for investors, 
which became more apparent over a long term.
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The s ix key f indings f rom the NYU Stern repor t
1. Improved financial performance due to ESG becomes more 
noticeable over longer time horizons.
2. ESG integration as an investment strategy performs better than 
negative screening approaches.
3. ESG investing provides downside protection, especially during a 
social or economic crisis.
4. Sustainability initiatives at corporations appear to drive better 
financial performance due to mediating factors such as improved 
risk management and more innovation.
5. Studies indicate that managing for a low carbon future improves 
financial performance.
6. ESG disclosure on its own does not drive financial performance.
Figure 28: NYU Stern results for investing in sustainability
Positive neutral Mixed negative Positive neutral Mixed negative
58%
57%
13%
29%
21%
9%
6%
8%
43%
33%
22%
26%
22%
28%
13%14%
● Corporate (all)
● Corporate (climate change)
● investor (all)
● investor (climate change)
Source: nYu Stern Center for Sustainable Business
T H E E S G I N V E S T I N G H A N D B O O K
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Top performing ESG funds and trusts 
over the last year/last f ive years
All of the below performance data is taken from the Good Investment 
Review (Square Mile Research and Good With Money: good-with-
money.com/2021/10/04/the-good-investment-review-october-2021).
UK Smal ler companies
Of the 16 ethical and sustainable funds identified by The Good 
Investment Review, 9 outperformed the Investment Association sector 
benchmark over 2021 (to August) and 7 underperformed but delivered 
the same average return of 16.8% as the benchmark over the period.
Over 5 years, 9 of the 16 outperformed the sector average, delivering 
higher average returns at 58.7% compared to the 44.2% returned by 
the benchmark.
The top five performers over the last year in the sector are:
UK Small Companies 
fund
5-year performance 1-year performance
Aegon Ethical Equity 46.8% 19.7%
ASi uK Ethical Equity 62.1% 21.4%
Castlefield BESt uK 
opportunities
44.2% 20.5%
Premier Miton Ethical 90.2% 19.5%
Schroders responsible 
value uK Equity
n/A 19.2%
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C H A P t E r 4 : ‘ P ’ i S F o r P E r F o r M A n C E
Figure 29: IA UK All Companies sector
● Average iA uK All Companies ● Average ri uK Equity Fund
60%
50%
40%
30%
20%
10%
0%
−10%
data as at 31st August 2021. total return with net income re-invested.
5 years201520162017201820192020Ytd
Source: Financial Express
Global equi t ies
Performance of ethical and sustainablefunds and trusts in the global 
equities sector was marginally higher in 2021 to August than the sector 
benchmark, at 15.4% compared to 14.8%.
Of the 46 funds and trusts in the Square Mile research Good Investment 
Review, 28 outperformed the benchmark in 2021.
Over the last five years, 7 of the 37 global equity funds in the Square 
Mile universe outperformed the sector average of 87.4%. Overall, 
the 37 funds delivered average returns of 101.7% – 14.3% above 
the benchmark.
T H E E S G I N V E S T I N G H A N D B O O K
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The top five performers over the last year in the sector were:
Global Equities fund 5-year performance 1-year performance
Pictet Water 104.2% 24.3%
Quilter investors Ethical 
Equity
77.3% 22.9%
nordea 1 Global Climate 
& Environment
n/A 19.6%
Edentree responsible and 
Sustainable Global Equity
74.2% 19.8%
GS Global Equity Partners 
ESG Portfolio
102.4% 19.8%
Figure 30: IA Global sector
● Average iA Global ● Average ri Global
120%
100%
80%
60%
40%
20%
0%
−20%
data as at 31st August 2021. total return with net income re-invested.
5 years*201520162017201820192020Ytd
Source: Financial Express
Ster l ing Corporate Bonds
As John Fleetwood, of Square Mile Research, says: 
“The performance of Responsible Investment Sterling Corporate 
Bond funds has been more mixed, as the Responsible Investment 
market is smaller for corporate bonds than in equities. However, in 
absolute financial terms, there is some evidence that Responsible 
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C H A P t E r 4 : ‘ P ’ i S F o r P E r F o r M A n C E
Investment Sterling Corporate Bonds funds have performed 
slightly better over the last five years, and, on average, they have 
outperformed in 2021.”
Over 2021 (year to August) responsible sterling corporate bond funds 
marginally outperformed the sector benchmark, returning 0.2% 
compared to −0.2%. 
Of the 10 corporate bond funds in the Square Mile research Good 
Investment Review, 7 outperformed the benchmark in 2021. 
Over the last five years, 4 of the 10 corporate bond funds in the Square 
Mile universe outperformed the sector average of 18.1%. Overall, the 
10 funds delivered average returns of 19.1% above the benchmark. 
The top five performers over the last year in the sector were:
Corporate bond fund 5-year performance 1-year performance
rathbone Ethical Bond 
Fund
31.4%
liontrust Monthly income 
Bond
22.8%
Sarasin responsible 
Corporate Bond
n/a 0.7%
Aegon Ethical Corporate 
Bond
17.1% 0.4%
royal london Sustainable 
Managed income trust
20.5% 0.3%
T H E E S G I N V E S T I N G H A N D B O O K
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Figure 31: IA Sterling Corporate Bond sector
● Average iA Sterling Corporate Bond ● Average ri Sterling Corporate Bond
25%
20%
15%
10%
5%
0%
-5%
data as at 31st August 2021. total return with net income re-invested.
5 years*201520162017201820192020Ytd
Source: Financial Express
Does ESG cost more?
When considering returns, fund charges are another factor to take 
into account.
Generally speaking, ESG strategies require a more active management 
style. The more specific and intense the approach of the fund, the 
higher the fee is likely to be. So, for example, an ESG ETF is likely to 
cost less than a positive impact global equity fund.
The primary reason to consider a higher fee for investing is a belief 
that the active strategy in a particular area is likely to lead to higher 
returns, whether that’s over the short or long term.
With an active ESG approach, not only is the rationale for paying 
more that it might lead to higher returns, it’s also an acknowledgment 
of the extra work that is involved.
There is a big ‘but’ coming. There is some evidence that the above 
argument provides the perfect justification for asset managers on 
lean profit margins adding a couple of bps on, creating some green-
coloured marketing material and branding an ETF as ‘ESG’, even if 
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it is being crowbarred into the category on thin justifications, simply 
to excuse that higher fee and despite being no more active than non-
ESG counterparts. Andrew Jamieson, global head of ETF product at 
Citigroup, said in a Wall Street Journal article in March last year: “It’s 
fresh, feels good and new… But it’s not any different than anything 
else. These things aren’t any more expensive to run.”5
Despite the claim that they are ‘not any more expensive to run’, data 
from Factset showed that exchange-traded funds focused on socially 
responsible investments had 43% higher fees than standard ETFs.
It’s possible that the higher fee/same basic product issue is more 
rife in the passive world of ETFs and that investors looking to track 
indices through these products should perhaps be more wary than in 
the world of collective funds or investment trusts, which involve more 
active strategies.
A look at the fees and charges for ETFs, funds and trusts within the 
interactive investor ‘ACE40’ range of ethical picks compared with its 
‘Super 60’ range of mainstream investments demonstrates that they 
are now roughly comparable.
The global bull market run of the past decade has meant that cheaper 
passive strategies have, overall, made sense, as active strategies have 
struggled to prove they have any advantage over lower cost vehicles 
that simply track the market. The ability to succeed at investing 
through simply tracking markets has given rise to the dominance of 
BlackRock and Vanguard in the asset management world. 
This would at first glance seem to present a quandary for the 
sustainability-minded investor: either I invest sustainably and pay 
more, or I ignore sustainability and pay less. Returns either way might 
work out more, less or the same and that might be because of ESG 
over- or underperformance relative to benchmarks or the impact of 
higher or lower costs.
However, the equation is changing all the time. As the responsible 
and sustainable universe of investment products has expanded and 
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companies within the ESG investment universe have matured, the 
number of passive investment opportunities in this area has also 
expanded. As a result of increased scale, costs have come down. To 
the extent that now, in Europe at least, global ETFs integrating ESG 
were found by Morningstar to charge an average of 0.28% compared 
with 0.3% for generic large-cap ETFs.6
Figure 32: ESG ETFs charges compared to non-ESG peers (%)
ETF category ESG non ESG
Europe large-Cap Blend 0.22 0.24
Eurozone large-Cap 0.21 0.22
Global Emerging Markets 0.27 0.39
Global large-Cap Blend 0.28 0.30
uK large-Cap 0.19 0.17
uS large-Cap Blend 0.19 0.22
Source: ignites Europe Analysis of Morningstar data. Average ongoing charges of 
European EtFs
Should ESG cos t more?
In theory, yes – as a reflection of the underlying assets supporting 
environmental and social progress. For instance, newer technologies 
not yet at scale cost more the earlier they are in their development. 
But over time, as ESG becomes more embedded, and to a degree 
taken for granted as the way things are, costs should fall. The caveat 
to this will be the increased cost involved in meeting new regulatory 
reporting requirements. At first, at least, the burden of reporting at 
a level of detail and regularity not previously required will increase 
costs for firms’ reporting and also investment management businesses. 
This may be reflected in a short-term reduction in profits for investee 
companies where the processes needed to meet requirements are 
not yet embedded, as they hire new staff, buy in or develop new 
data gathering systems and even adjust business models to meet 
new standards.
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Actual investors 
think in decades.
Not quarters.
SEARCH FOR ACTUAL INVESTORS
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ESG (non-f inancia l ) per formance
The 2021 UTILstudy found that investments with an ESG-related 
label did perform better from a sustainability perspective. The results 
are statistically significant for SDGs 3 (Good Health & Wellbeing), 6 
(Clean Water & Sanitation), 9 (Industry, Innovation & Infrastructure), 
12 (Responsible Consumption & Production), 13 (Climate Action), 
14 (Life Below Water), 15 (Life on Land), and 16 (Peace, Justice, & 
Strong Institutions). The only exception is SDG 17 (Partnership for 
the Goals), where there are far fewer opportunities to invest.
The net SDG score of the sustainable funds in its study was 3/100, 
compared with 1/100 for the total fund universe – a 2 percentage 
point difference. But the study also pointed out that better relative to 
non-ESG counterparts does not mean objectively ‘good’:
“For some SDGs, relative goodness doesn’t translate into positive 
impact. Of the eight SDGs where the relative outperformance of 
sustainable funds is significant, five are still negatively impacted: 
sustainable funds perform a little less badly, but the net impact is 
still bad.”7
The shor t and the long of i t : the impor tance of 
t ime f rames in ESG inves tment
Sustainability doesn’t exactly sound like a get-rich-quick scheme. It 
really isn’t.
It does need to be a save-the-planet-quick strategy, though, so there is 
an innate conflict between the amount of time we have to limit global 
temperature rises and the amount of time a sustainable approach 
needs, which, as the Baillie Gifford advertisement suggests, is decades.
What this means for returns expectations is that they should be lower 
on average, annually, over time and possibly also less volatile.
But what has happened in practice is that the initial rush for ESG 
investments has resulted in a lot of money chasing fewer investments, 
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early on in the development of the approach. This ‘gold rush’ has 
arguably artificially buoyed returns and also created high ongoing 
return expectations, particularly among those investing for the first 
time – perhaps because they were attracted to investing by ESG – who 
have not previously experienced a boom and bust cycle.
It’s important, while taking due account of frequent outperformance 
in recent years among responsible and sustainable funds, as outlined 
in the tables from Square Mile Research on the previous pages, to 
also acknowledge that the outlook for returns, by the very sustainable 
nature of the underlying investments, may be more underwhelming.
Outperformance in recent years may be less a result of the intrinsic 
value or profitability of more sustainable businesses. It’s important to 
point out that the more sustainable a business is, in fact, the less likely 
it is to demonstrate stratospheric outperformance. The clue may be in 
the name. That’s not to say a sustainable business can’t be profitable 
– there are plenty of studies to demonstrate that sustainability doesn’t 
have to lead to lower profits and, done well, can lead to higher profits.
A 2014 study by Oxford University and Arabesque Partners is useful 
to consider here because it was authored before the recent surge in 
growth of sustainable investment that began around 2018/19.
The study: ‘From the stockholder to the stakeholder’ confirmed that 
there is a conclusive correlation between good business practices in 
sustainability and economic profitability in the medium to long term.8
The study showed 88% of the 200 sources reviewed found that 
companies with solid sustainability practices have better operational 
performance, resulting in higher cash flows, and 80% of the sources 
showed sustainability practices had a positive influence on returns 
on investment.
Another study, conducted by Royal London Asset Management in 
January 2018, again before the period of exceptionally strong growth 
for ESG-related investments began in earnest later that year, found that 
the average return of sustainable companies (as per RLAM definition) 
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in the FTSE 100 was 14.7% per year; the average return of FTSE 100 
companies was 10.3% and the average return of the stocks that did not 
pass RLAM’s sustainable criteria was 8.6%.
However, there are often higher costs associated with more sustainable 
production methods, which can translate into higher prices and 
lower growth.
It is important for sustainably-minded investors to consider the 
fundamental drivers of the sectors they are investing in, as well as 
ESG scores, in order to manage expectations around returns. There 
are differences in the way renewable energy and traditional energy 
sources produce returns, for example. Renewable energy installations 
involve converting renewable sources such as solar and wind into 
electricity. The sun and wind are in infinite supply, and this acts as 
a natural drag on returns. Unlike oil, there are no taps to turn off 
to push prices up. On the other hand, there are a number of drivers 
that support profits in the sector: the cost of the technology for the 
installations, for instance, is coming down, which can result in bigger 
profit margins for the companies manufacturing panels and turbines.
In this case, slow and steady could be the ultimate name of the 
game. And for this to become apparent, we need to be observing 
performance, as the Baillie Gifford advertisement says, in decades 
rather than quarters.
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ESG 
S t ra tegies
C
H
A
P
TE
R
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A s interpretations of what ESG means vary from person to person, 
company to company and asset manager to asset manager, so 
too do the strategies employed to be better at ESG.
You might wonder whether a strategy is needed at all, given the 
general sway from policymakers and regulators towards ESG 
incorporation across the business and investment worlds. Surely it will 
just happen anyway?
Unfortunately, the bigger picture of catastrophic climate change 
means that strategies are very much necessary.
The status quo is not going to bring down global temperatures 
sufficiently. Research from the Science-based Targets Initiative 
showed that none of the largest stock indexes operating in G7 nations, 
including the FTSE 100, S&P 500, the DAX 30, the NIKKEI and the 
CAC 40 in France, are aligned with the Paris Agreement.1 The indices 
are thought to be on an average pathway of a 2.95°C temperature 
increase by the end of the century, with the FTSE 100 and SPTSX 60 
the worst performers.
Engagement versus divestment
So what is the best way to change this? There are divergent views. 
This chapter will consider the merits and disadvantages of arguably 
the biggest question facing all environmentally-minded investors: do 
I buy shares in fossil fuel companies and use my shareholder voice 
to change them? Or do I exclude fossil fuels from my investments 
completely and invest in solutions-based companies instead?
Many ESG investors will instinctively want to exclude fossil fuels. Yet 
T H E E S G I N V E S T I N G H A N D B O O K
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others do not, and we will cover the reasons why they take this counter-
intuitive approach in the upcoming section on ‘engagement’.
The FTSE4Good Index is a good example of a non-exclusionary 
strategy. It includes Shell and Rio Tinto, for example, and justifies 
these holdings by citing its responsibility to raise ESG standards at the 
companies it tracks. In June 2021, it tightened the screws and gave 208 
companies on its list 12 months to tighten climate standards or face 
deletion from the index.2
Figure 33: Performance and volatility – total return (UK)
Index (GBP) Return % Return 
pa %*
Volatility %**
3M 6M YTD 12M 3YR 5YR 3YR 5YR 1YR 3YR 5YR
FTSE4Good UK 4.6 6.0 17.4 17.4 24.5 29.8 7.6 5.4 12.1 19.4 13.5
FTSE All-Share 4.2 6.5 18.3 18.3 27.2 30.2 8.3 5.4 11.9 20.0 13.9
FTSE4Good UK 505.2 6.7 17.0 17.0 22.5 28.6 7.0 5.2 12.3 18.5 12.7
* Compound annual returns measured over 3 and 5 years respectively 
** volatility – 1Yr based on 12 months daily data. 3Yr based on weekly data 
(Wednesday to Wednesday). 5Yr based on monthly data
Source: FtSE4Good index
Since 2014, the FTSE Russell group has also offered a series of indices 
that exclude fossil fuels, including oil and gas, coal and mining. Their 
performance comparing the benchmarks over one, three and five 
years can be seen in Figure 34.
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Figure 34: Performance and volatility – total return (World)
Index (USD) Return % Return 
pa %*
Volatility %**
3M 6M YTD 12M 3YR 5YR 3YR 5YR 1YR 3YR 5YR
FTSE All-World 
ex Fossil Fuels
6.7 5.6 18.4 18.4 80.3 105.6 21.7 15.5 10.6 17.9 14.7
FTSE Developed 
ex Fossil Fuels
7.5 7.4 21.0 21.0 85.4 111.8 22.9 16.2 10.9 18.1 14.8
FTSE Emerging 
ex Fossil Fuels
−0.8 −8.5 −1.9 −1.9 40.4 59.6 12.0 9.8 15.0 19.3 16.3
FTSE All-World 6.6 5.6 18.9 18.9 76.3 99.8 20.8 14.8 10.5 18.3 14.9
FTSE Developed 7.6 7.3 21.4 21.4 81.3 105.2 21.9 15.5 10.8 18.5 15.1
FTSE Emerging −1.0 −7.5 0.1 0.1 39.4 60.6 11.7 9.9 14.6 19.6 16.4
* Compound annual returns measured over 3 and 5 years respectively 
** volatility – 1Yr based on 12 months daily data. 3Yr based on weekly data 
(Wednesday to Wednesday). 5Yr based on monthly data
Source: FtSE russell
Engagement
Engagement is a term used to describe what investors do when they 
try to use their shareholding to influence change within companies 
and encourage them to improve their environmental, social and 
governance standards.
Engagement can take the form of voting in favour of shareholder 
resolutions, requesting and attending meetings with investee 
companies to discuss progress on an issue and finally, depending 
on whether progress is being made according to the desired 
timescales, potentially threatening to divest, or sell shares, and then 
eventually divesting.
In truth, the success of engagement as a strategy varies widely from 
asset manager to asset manager, dependent on the level of resource 
available to sustain consistent pressure on often hundreds of investee 
companies on an ever-increasing list of ESG issues. Asset managers 
often have to pick and choose where they feel they can be most effective. 
T H E E S G I N V E S T I N G H A N D B O O K
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They also have to be mindful of the resources of the investee company 
in meeting the constant need for engagement from shareholders. 
Some asset managers argue that placing constant demands on 
companies, particularly smaller and medium-sized companies, for an 
endless carousel of calls and meetings, can get in the way of them 
getting on with their day-to-day business.
Genuine engagement can be effective, but engagement for the sake 
of it can also feel like a hollow box-ticking exercise. It can be difficult, 
as an outside investor in the funds that hold the companies with 
which asset managers are engaging, to assess the degree to which this 
engagement is genuine, meaningful and ultimately effective.
Whether to engage or divest (on which there is more to come) may 
be a moral question for some, but for others it’s a purely practical 
question of efficacy in achieving goals.
Where some people see the word ‘engagement’, others simply see an 
excuse for profiting from companies that it no longer feels right to 
profit from. Because an engagement strategy can be used to justify 
holdings that do not necessarily correlate with expectations, for 
example a Shell holding in a climate fund, it can often provoke ire 
and disappointment among the ultimate share owners – people with 
pensions and ISAs.
However, there are plenty of sound arguments to support it as a strategy.
The engagement rationale:
1. If responsible shareholders didn’t own assets such as fossil fuels, 
then less responsible shareholders would buy them and not 
only would the problem not go away, it would get worse. Some 
shareholders may own the shares anyway as a result of legacy 
investments from years ago, so even if they no longer believe in the 
company’s primary profit-making activity, it could be better to use 
this shareholder power to change the company from within rather 
than sell out and let it fall into the wrong hands.
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2. Shareholders have more power than governments or regulators to 
force through changes from within. Simply put, shareholders own 
companies. They can vote in how those companies are run. Activist 
shareholders can create big changes relatively quickly, compared 
to the slower passage of regulation and then enforcement. So 
being ‘active’ and creating shareholder resolutions, then garnering 
support from other shareholders for those resolutions, is a way to 
force through changes.
For asset managers favouring an engagement approach, for the time 
being at least, there is risk to it. Engagement has to be successful in 
order for the ESG risk associated with the action to be minimised, and 
while a shareholder resolution is pending or is not voted through, the 
risk – both financial and non-financial – of being a shareholder in that 
company increases.
Large shareholders nursing failed engagement strategies could end 
up bearing the brunt of any associated losses in value further down 
the line. Engagement must not fail if it is to protect the value of 
their – and our – investments. The stakes are high. The risk is that if 
the engagement fails to generate sufficient progress, the valuations 
of those companies with poor ESG track records and even poorer 
ESG prospects in the future go down over time, as the policies and 
regulations, for example on carbon emissions, gradually stack higher 
against them.
What i s good engagement?
If holding stocks with dubious ESG credentials is going to be considered 
justified on the basis that asset managers can change these companies 
from within, then the engagement that is the key mechanism for this 
has to be effective.
But how can engagement be judged as effective? If an asset manager 
says they are engaging, what are the key methods of engagement that 
investors should be looking for?
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It’s reasonable to say that having the odd phone call to check progress 
on an issue of ESG performance is unlikely to be enough for a company 
to feel inspired to change.
Holding feet to the fire feels like the best engagement strategy, 
particularly on issues of urgency such as climate change, however, 
some asset managers argue that a pushy approach can often backfire 
and sometimes hand-holding and collective solution-seeking are more 
effective methods of engagement.
As we move through 2022, it’s likely that we will see more big threats 
and consequences from large institutional investors directed towards 
investee companies.
Aviva Investors set the tone in January, when in his Annual Letter to 
Chairs, Mark Versey, Chief Executive of the £262bn asset manager, 
said the firm would judge companies this year against expectations 
on biodiversity and human rights as much as climate and executive 
pay. He said:
“Companies must now turn their pledges into concrete and 
measurable plans of delivery. Our letter sets out clear expectations 
as to how they should do this, and what those plans must address 
across climate impact, biodiversity and human rights.”
Versey highlighted that addressing just one area would be a less 
effective approach because it might trigger negative impacts that would 
undermine another aspect of the transition to a sustainable economy.
“Simply cutting emissions but allowing the destruction of 
the rainforest to continue will do little to reverse global 
warming. Companies need to adopt an integrated approach for 
maximum benefit”.
The letter states Aviva Investors will hold boards and individual 
directors accountable at companies where the pace ofchange on 
climate, biodiversity and human rights does not exhibit sufficient 
urgency. The asset manager also wants executive compensation 
structures and performance targets to reflect sustainability goals.
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Aviva Investors undertook 1277 substantive engagements in 2021 
and voted at 6,648 shareholder meetings, voting against 26% of 
management proposals tabled.
In 2021, Aviva Investors voted against the re-election of directors at 
137 companies for lack of progress on ethnic diversity and opposed 
directors at 85 companies due to human rights concerns. The firm 
also rejected 33% and 68% of executive pay proposals in the UK and 
US, respectively, on concerns over quantum and structure.
The asset manager will divest in cases where companies consistently 
fail to meet its requirements. Last year, Aviva Investors introduced a 
1.5°C-aligned engagement programme focused on 30 of the world’s 
worst carbon emitters, with an ultimate sanction of divestment if its 
expectations are not met over one to three years.
An example net zero pledge and associated engagement strategy 
commitment from LGPS Central Limited, published in January 2022:
“We will utilise the Institutional Investor Group on Climate 
Change’s (‘IIGCC’) Net Zero Investment Framework to achieve 
Net Zero emissions across our internally and externally managed 
portfolios by 2050 (or sooner), focusing initially on Listed Equities, 
Corporate Bonds, Sovereign Bonds and Real Estate.
“In addition, we will have an interim target where we will aim to 
achieve a 50% reduction in GHG emissions by 2030 across our 
equity and fixed income portfolios.
“We are committed to extending our focus to include other asset 
classes as reliable data become available and to provide attractive 
investment opportunities in the renewable energy and green tech 
sectors to match our partner fund’s demands.
“In accordance with the objectives of our partner funds, our aim 
is to achieve a real reduction in GHG emissions rather than an 
avoidance of them. We will engage with investee companies to 
achieve this aim and expect our external managers to do the same.
“We will challenge corporate management on their reporting of 
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GHG emissions, their strategies, and activities to reduce emissions, 
their use of off-sets and their lobbying activity. We will escalate 
concerns where necessary and use our voting rights accordingly.
“A commitment to achieving Net Zero is not a replacement for 
robust ESG analysis and we will continue to have high expectations 
of our external managers and expect our investment portfolios to 
reflect this detailed scrutiny.”
Whatever is the tone, whether it’s teeth and threats or encouragement 
and collaborative problem-solving, it’s clear that engagement has to 
involve interaction of some kind, whether that’s meetings, phone calls 
or email exchanges.
Common sense suggests that these should be reasonably regular, 
however as some fund managers argue, this can amount to unnecessary 
distraction for companies who would be better off deploying their 
energies in their actual business rather than continually using up time 
and money answering to the demands of vociferous shareholders.
Voting and holding companies to account on their commitments, 
working with companies to set commitments and establishing paths to 
achieving them and – crucially – following through if agreed objectives 
are not met or if shareholders’ views are repeatedly ignored, are all 
key facets of good engagement.
Ultimately, the ability of shareholders to vote is the key mechanism 
of power in the relationship between individual investors, asset 
managers and companies. This is why one group of campaigners set 
up Follow This, an organisation that perhaps counter-intuitively buys 
shares in oil companies using members’ money to wield collective 
firepower to force oil companies to switch to renewable energy.3 We 
discuss shareholder voting in more detail in Chapter 7, ‘Grassroots 
and People Power’.
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How do asse t managers vo te?
Data from ShareAction, the responsible investment NGO, suggests 
that despite many claims of practising effective engagement strategies, 
the asset management industry is still “largely failing to use its voting 
power to drive better social and environmental performance from 
listed companies.”
The organisation’s 2021 study found that 30 out of 146 ESG resolutions 
(21%) received majority support this proxy season. Majority support 
does not guarantee that a proposal will be implemented, although 
research by BlackRock has shown that resolutions which pass the 50% 
threshold are implemented in 94% of cases.4
On average, the 51 asset managers assessed in both 2020 and 2021 
increased their proportion of votes in favour by just 4 percentage 
points. But although the voting performance of the industry as a whole 
remains stagnant, some individual managers did show substantial 
improvement. Credit Suisse and Nordea increased their percentage 
of ‘for’ votes by 61 percentage points each, supporting 77% and 91% 
of ESG resolutions this year, respectively.
BlackRock, the world’s largest asset manager, supported 40% of the 
assessed resolutions this year, compared to 12% last year. However 
ShareAction found that BlackRock still voted against:
• 100% (6 out of 6) of resolutions on executive pay disparity.
• 72% (8 out of 11) of resolutions on gender pay disparity.
• 100% (8 out of 8) of resolutions on employee representation at 
board level.
• 100% (7 out of 7) of resolutions on public health and tobacco.
• 100% (2 out of 2) of resolutions on weapons companies.
Some asset managers vote more conservatively than their proxy 
advisers recommend, according to ShareAction. ISS and Glass Lewis, 
two of the biggest proxy advisory firms in the US, recommended that 
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investors support 75% and 44% of the assessed resolutions, respectively. 
But BlackRock, Vanguard, Fidelity Investments, State Street Global 
Advisors, Capital Group, and JP Morgan Asset Management all 
supported fewer than 40% of these resolutions, the study found.
Power and influence over resolutions is disproportionately held by 
the so-called ‘Big Three’ global asset managers: BlackRock, Vanguard 
Group and State Street Global Advisors, which account for $20trn 
in assets under management and are now responsible for 25% of all 
shareholder votes cast.
ShareAction argues that conservative voting from these asset managers 
has an outsized influence in holding back progress by companies on 
ESG issues. It found that 18 resolutions could have passed the 50% 
threshold if one or more of BlackRock, Vanguard or State Street had 
voted differently. So put bluntly, shareholders have power, but some 
have more than others, and these three asset managers have the most. 
So if they are on a company’s shareholder register, what they do on 
voting and engagement matters more as things stand than whatever 
anyone else does.
the power o f shareholder vo t ing – bu t B lackrock, 
vanguard and S ta te S t ree t ho ld the cards
uS energy infrastructure company, Sempra Energy, has been widely criticised 
for lobbying against energy efficiency standards. A shareholder resolution 
requested that the board of directors issue a report describing how the 
company’s lobbying activities align with the goals of the Paris Agreement 
and how Sempra plans to mitigate risks presented by any misalignment.
Both iSS and Glass lewis recommended that shareholders vote in favour of 
the resolution, but the Big three all voted against. As a result, the resolution 
secured just 37.5% support. 
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Voluntary membership of commitment-led organisations such as 
Climate Action 100 and Net Zero Asset Managers doesappear to 
make a difference. Asset managers that are members of these alliance 
organisations vote more supportively than non-members on climate 
resolutions. Members of CA100+ supported 72% of climate resolutions, 
compared with 54% supported by non-members, while NZAM 
members supported 70%, compared with 61% for non-members, 
according to ShareAction.
But both groups contain significant laggards when it comes to voting. 
Swedbank Robur and Santander Asset Management supported fewer 
than 20% of climate resolutions at companies in which they had 
holdings, despite being members of both NZAM and CA100+, while 
CA100+ member MEAG did not support any climate resolutions.
Attention on climate goals may be at the expense of effort to pass 
through socially-focused resolutions. ShareAction found that only 13 of 
89 social resolutions (15%) received more than 50% of shareholder votes. 
Those 13 resolutions all called for disclosure of diversity information, 
whereas resolutions aimed at changing corporate behaviour generally 
struggled to achieve more than 30% shareholder support.
Shareholders appeared to be most reluctant when it comes to 
resolutions that might affect executive pay, with very low levels of 
support for linking CEO pay to the salary bands of other employees. 
Resolutions focused on public health or decent working conditions 
also failed to garner support by asset managers in the 2021 proxy season.
Alarmingly, ten asset managers, including BlackRock, Vanguard and 
JP Morgan, voted against resolutions calling for human rights due 
diligence reporting at companies supplying weapons to states with a 
record of alleged human rights violations.
Lockheed Martin and Northrop Grumman have contracts with Saudi 
Arabia, Israel, and the United Arab Emirates (UAE). Human rights 
organisations have recorded consistent and indiscriminate use of 
Lockheed Martin weaponry against civilians and linked its weaponry to 
war crimes and violations of international humanitarian law in Yemen. 
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The shareholder proposals at these two companies requested them 
to conduct a report on human rights due diligence and an impact 
assessment, examining potential human rights impacts associated 
with high-risk products and services, including those in conflict-
affected areas.
Both resolutions would have received majority support had those ten 
managers voted in favour of the proposal. In their voting rationales, 
these managers said they believed there to be sufficient disclosure 
already. However, an analysis of the companies’ reporting reveals 
that both companies lack reporting on the human rights impacts of 
their products. ISS recommended shareholders vote in favour of the 
resolutions. 
Passive versus ac t ive asset 
management in ESG
Why don’t BlackRock, Vanguard and State Street engage in more 
resolutions and voting at the companies in which they hold trillions of 
dollars of shares on behalf of millions of people?
The main reason is that their fund management strategies are what’s 
known as ‘passive’. Passive investments track indices. As they don’t 
require as much work from the fund manager, the fees are much 
lower than the fees paid for ‘active’ funds, where managers pick stocks 
and try to outperform benchmarks. According to Granite Financial 
Planning, the average annual fee for actively managed equity funds is 
0.9%, compared with 0.15% for passive funds.
Passive funds have grown enormously in popularity over the last ten 
years, as global stock markets, boosted by quantitative easing, have 
generally risen, making them a relatively cheap way of getting good 
returns. The amount managed by passive funds in the UK stood at 
£220bn as of the end of September 2021, according to the Investment 
Association, with a 17% share of funds under management. Active fund 
managers, in this climate of generally rising markets, have struggled to 
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justify their fees, as performance for active funds has struggled to beat 
that of passive funds.
One area where active fund management strategies have felt more 
justifiable has been in ESG. Having to choose investments on the basis 
of whether they represent good Environmental, Social or Governance 
practice – as well as on their prospect for future returns – has meant 
that those active fund managers focused on ESG have been able to 
explain the extra value they add and their higher charges. That extra 
work they will do might also involve engagement with companies and 
voting for or against shareholder resolutions.
From the point of view of shifting capital for the climate emergency, 
it’s clear that passive investment management is not particularly 
useful, at least at face value. No engagement, no shareholder voice, 
no stewardship or involvement with the companies in receipt of the 
cash means no levers to pull for change.
Of course, the immense size that passive fund houses have now grown 
to – BlackRock, Vanguard and State Street now own roughly 20% 
of the S&P 500 – means they wield enormous power, whether they 
currently use it to good effect or not.
There are signs that they are beginning to use this power in selective 
battles. In June last year, BlackRock, Vanguard and State Street voted 
against Exxon Mobil’s board and backed a hedge fund, Engine No. 1, 
to install three new board members.5
If Larry Fink’s words in his annual CEO letter are anything to go by, 
then it would be wise to expect more activism from the passives in the 
near future.
Dives tment
The divestment movement began via a tour of college campuses in 
America. In 2012 Bill McKibben, the US environmentalist, started the 
campaign via his website 350.org. Students realised that universities 
and other large organisations were propping up and profiting from 
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the fossil fuels industry and urged them to sell their shares, on 
moral grounds.
The divestment campaign movement reached a high in 2016 with its 
‘keep it in the ground’ message, which at one point took over The 
Guardian’s website, and while the original campaign has now ended, 
other related campaigns have sprung up. The movement remains 
powerful and persuasive, and the central idea – for shareholders to 
sell out of fossil fuels completely – is as simple as ever.6
Divestment is the antithesis of engagement. Many climate 
campaigners considering the impact of investment on climate change 
find themselves pulled between one argument and the other. Most 
instinctively feel divestment is the morally correct response, but find 
it hard to refute the benefits of shareholder activism if we are to 
accept the reality that fossil fuel companies exist, underpin the global 
economy and might even have the biggest role to play.
For first-time investors building portfolios that are aligned with the 
UNSDGs and the Paris Agreement on climate, the answer to the divest 
or engage quandary is straightforward – if you are starting from scratch 
there is nothing to divest from or engage with. Idealism can reign.
The dilemma is really one for the world’s biggest asset managers who 
have held fossil fuel shares for a long time and who are choosing 
between losing their well-intentioned ability to influence or retaining 
it and trying to make a difference the hard way. Divestment may be 
the eventual end point of engagement, if the engagement doesn’t 
work as planned.
Debt versus equi t y
The difficulty in determining the best strategies for ESG goals does 
not end there. The type of financing being withdrawn from harmful 
industries is also part of the debate. Divestment of equity is one 
approach – denial of debt financing is another. While the majority 
of attention has been on asset owners – the shareholders – and how 
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they can improve ESG standards and particularly carbon emissions 
at investeecompanies, another significant lever can be pulled by 
issuers of debt.
Some argue that denial of debt is more effective than equity divestment 
at reducing overall capital flows to the sector, although in reality 
debates here tend to settle on a conclusion that both are important 
ways to reduce the amount of money going into fossil fuels.
To backtrack a little, broadly speaking there are two methods of 
offering finance to companies: you either lend them an amount of 
money in return for a fixed rate of interest and the initial capital back 
after an agreed period (debt financing) or you buy shares in that 
company (equity), so that as the company grows so does the value of 
your shares. At a future point in time, when hopefully it is worth more, 
you can sell those shares.
Andreas Hoepner, a senior academic specialising in sustainable 
finance, explains that debt denial involves the non-renewal of 
high-yield corporate bonds to fossil fuel industries.
He told Good With Money in 2015:
“The problem with the divestment campaign, however well-
meaning, is that it has not fully understood the way oil companies 
are financed. While it sounds on the face of it to be an effective 
strategy, selling shares, apart from making a statement, is actually 
pretty ineffective. What you want to do, as an investor, is refuse 
to renew a high yield corporate bond at the end of the term, in 
effect starving the company of cash flow immediately. But this 
message is perhaps not quite as easy to translate to the masses, or 
for campaigners to understand.”
It’s a potentially more immediate strategy as the loans come up for 
renewal continuously. 
A 2020 research paper by the University of Belfast, ‘Does the fossil 
fuel divestment movement impact new oil and gas fundraising?’ co-
authored by Professor Hoepner found that increasing oil and gas 
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divestment pledges in a country, particularly where these are signalled 
by non-financial organisations and non-governmental organisations 
(NGOs), are associated with lower new capital flows to domestic 
oil and gas companies.7 This effect is enhanced in more stringent 
environmental policy regimes and diminished in countries which 
heavily subsidise fossil fuels.
However, it also found the divestment movement may be having an 
unintended effect, insofar as domestic banks situated in countries with 
high divestment commitments and stringent environmental policies 
provide more finance to oil and gas companies abroad.
This is an important unintended consequence and may be a criticism 
of the ESG-at-home-but-not-abroad policies that we could hear 
more about in the coming months, as the UK, European and US 
governments make great strides on home soil towards reducing carbon 
emissions, but may be supporting the continued growth of fossil fuels 
in countries further afield.
So if debt denial is potentially more immediately effective, is it 
happening? And if not, why not?
Lending to fossil fuel companies is the domain of banks, as is lending 
to cleaner energy sources. On the latter, there has been no shortage 
of progress. The Climate Bonds Initiative recorded that total volumes 
for the labelled sustainable debt market – including labelled Green, 
Social and Sustainability (GSS) bonds, Sustainability-linked bonds 
(SLB) and Transition bonds – reached nearly half a trillion ($496.1bn) 
in the first half of 2021. This amount represents 59% year-on-year 
growth from the equivalent period in 2020. It also sets the market on 
track to reach record highs for 2021 after a 2020 total of nearly $700bn.
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Figure 35: Green bond labelled issuance: five-year growth
U
SD
 B
ill
io
ns
 
700
600
500
400
300
200
100
0
2016 2017 2018 2021-H12019 2020
Source: Climate Bonds initiative
But more lending to renewable energy doesn’t have to come at the 
expense of fossil fuel lending – it’s often on top of it. This doubling 
up rather than replacement strategy was highlighted in a recent blog 
by Mariana Mazzucato, professor at the UCL Institute for Innovation 
& Public Purpose, who points out that many of the signatories to Mark 
Carney’s GFANZ Alliance continue to lend to fossil fuels companies 
and “some have even issued new financing to companies expanding 
fossil fuel infrastructure since signing up with the GFANZ”.8
There appears to be a reluctance to end the renewal of debt financing 
of fossil fuel companies completely.
It’s possible that a more subtle debt strategy may be adopted by banks 
– either alongside or instead of denying debt completely. Ben Ratner, a 
senior director at the Environmental Defense Fund, told CNBC.com: 
“alongside reducing overall funding to the fossil fuel industry, banks 
should use their most powerful tools – like loan eligibility and rates 
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– to incentivise corporate clients to reduce polluting practices like 
methane emissions and gas flaring, while transitioning to sustainable 
business models.”9
This idea of the potential effectiveness of ‘strings attached’ lending is 
echoed by Mazzucato, who points to:
 “Germany’s state-owned development bank, KfW, which offers 
loans to the steel industry that include conditions to reduce carbon 
and emissions. Or the French and Dutch Covid bailouts for national 
airline carriers Air France and KLM, which enforced conditions 
including cutting domestic flights that compete with rail travel and 
reducing absolute carbon emissions. Conditions like these need to 
be extended across the board to make it impossible for carbon-
emitting companies to operate.”
For investors looking to improve the ESG profile of their portfolio, 
retracting loans or adding conditions is not an option. However if they 
are shareholders in the banks doing the lending, they can make their 
voices heard. According to the campaign group Reclaim Finance, 
the UK’s five biggest banks: Barclays, HSBC, NatWest, Lloyds and 
Standard Chartered invested nearly £40.4bn into the coal industry 
between 2018 and 2020.
We have focused on ESG in the banking sector in Chapter 3, but banks 
clearly have a significant role to play in debt markets and continue to 
stoke the fires of fossil fuel industries.
Funds, t rusts , E TFs, d irec t equi t ies , 
bonds – which is best for ESG?
While an ESG approach can be applied to many asset classes, there 
are degrees of effectiveness and timescales to consider. For an investor 
wanting to make their portfolio more ESG-friendly, it may be worth 
considering a range of different product types and asset classes, taking 
care not to double up on underlying holdings if there is overlap 
between funds.
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The following is a selection of ESG-focused funds and trusts, from Ben 
Faulkner, EQ Investors:
Funds
ninety one Global Environment Fund (energy & transpor t)
A global equity fund investing in companies engaged in activities that 
are helping to drive the unprecedented shift in energy systems and 
transport that will result in decarbonisation. The managers, Deidre 
Baker and Graeme Baker have significant experience in this area 
and bring immense expertise from working in renewable energy and 
microfinance investment to the table.
impax Asian Environmental Markets (energy transi t ion amongst 
other themes)
A fund that looks to deliver a portfolio of Asian stocks that play into 
broad environmental themes that are chosen for their positive impact 
as well as the potential for compelling returns.
Fideli t y Sustainable Water & Waste (food)
A thematic equity fund investing in companies across the entire water 
and waste value chains.
Bail l ie Gif ford Health innovation (healthcare)
A thematic equity fund investing at the edge of innovation within the 
healthcare sector, with a focus on companies transforming human 
health or improving existing healthcaresystems.
rathbone Ethical Bond (banking, insurance, green gi l ts)
A fixed income fund that focuses on the bonds of UK corporates that 
are engaged in activities with a benefit to society and the environment.
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inves tment t rus t s
Keystone Posi t ive Change trust (healthcare)
Managed by the Baillie Gifford Positive Change team, this global 
equity trust invests across both developed and emerging markets and 
focuses on several social and environmental impact themes that are 
aligned with the UN Sustainable Development Goals.
BSC Schroders impact trust ( infrastructure & proper ty)
The BSC Social Impact Trust, created by Big Society Capital in 
partnership with Schroders, was the first trust dedicated to impact 
investing to go public on a stock exchange. Obtaining highly 
impactful private market exposure has previously been the preserve 
of institutional investors – due to high investment minimums and 
partnership fund structures. The launch of this unique social impact 
trust provides access to a diverse mix of social impact investments at a 
time when social issues are understandably at the forefront.
Harmony Energy income trust (energy)
An energy storage investment trust, which is building Battery Energy 
Storage Systems (BESS) on sites across the UK. Tesla is one of the 
primary battery providers and these are large scale projects that plug 
directly into the National Grid to supply two hours of on-demand 
power and load balancing.
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Figure 36: Interactive Investor ACE 40 investments
Source: interactive investor
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Developing a personal ESG s t rategy
If you are building an investment portfolio and would like it to have 
an ESG focus, it could be helpful to ask yourself a range of questions 
first. For example:
1. What i s sues are par t icu lar ly impor tan t to me? 
If many issues are important to you, try to rank them in order of priority.
2. Have i p icked a range of asse ts , geographies and 
product t ypes?
The normal rules of investing still apply with ESG – you do not want all 
your eggs in one basket. Your portfolio could still have a climate focus, 
but you would be wise to consider a mix of assets such as property 
(with a focus on more sustainable property companies), technology 
(with a focus on renewable energy-led technology companies) and 
then perhaps a fund focused on sustainable food production and 
distribution. Having said that, it is possible to very consciously and 
deliberately choose to concentrate your investments in one area, as 
long as you are aware of the risks.
3. Have i cons idered the r i sk prof i le o f the inves tments 
i have chosen and the i r overa l l ‘cor re la t ion’ to the res t 
o f the marke t?
Funds come with an ‘SRRI’ – a Synthetic Risk and Reward Indicator 
– which tells you the probability of short-term price fluctuations. 
Those with a higher proportion of equities are likely to have a higher 
SRRI, but it depends on other factors, too. The ‘correlation’ of the 
investment refers to whether it tends to follow the general market 
trend or perform against it. Green infrastructure and commodities 
are often considered uncorrelated assets.
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4. i s there a premium for the ESG inves tments i am 
look ing a t and do i cons ider i t wor th i t?
The ESG funds you are looking at might come with a higher cost for 
the active management involved in applying the strategy – or they 
might not. As we discuss in Chapter 4, not all ESG investments come 
at a premium. However, it depends on the one you are considering. 
Whether you consider it worth it will, to a large extent, depend on the 
managers of the fund you are considering and the appeal to you of 
their strategy.
5. Should i p ick equi t ies or bonds?
This is where personal circumstances come into play. You might have 
read that green bonds are the best way to shift the dial on climate 
targets, but that doesn’t mean they are necessarily going to be the 
best thing to put in your personal pension, if you are many years 
from retirement. If you are then it would make sense to have a higher 
proportion of equities across a range of asset classes, giving your pot 
the best chance of growth over the many years you have until you need 
the money. When building a portfolio the choice of asset class will also 
involve your personal goals as well as your wider values. It should be 
possible to combine both.
Jeannie Boyle, chartered financial planner at EQ investors, walks through 
the key decision points for investors venturing into this area:
1. understand your timeframes/investment objectives.
2. decide on your split between growth (equities) and defence (bonds). 
Equities means volatility, but over the long term this doesn’t matter.
3. decide the issues/sectors you want to include/exclude – some will be 
red lines, some more flexibility.
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4. is your selection diversified? Stress the importance of this. A lot of 
sustainable funds are tech heavy. Make sure you haven’t got five really 
similar funds.
5. How much risk am i taking? volatility, Srri, liquidity etc.
6. Am i comfortable with the cost?
7. review periodically.
Five minutes with Amy Clarke, chief 
impact of f icer at Tribe Impact Capital
inves tor perspec t ive : what ’s 
impor tan t to me? How to 
dec ide
As a discretionary wealth manager, it’s 
important for us to help our clients 
understand what’s important to them, 
both financially and from a sustainable 
impact point of view. In a complex world 
of social, environmental and economic 
risks and opportunities this can be quite 
challenging for wealth holders to navigate. 
That’s why we developed our ImpactDNA™ 
interactive assessment to help clients 
understand this complexity and crossover in 
the social, environmental and economic issues we 
face. We call this their ImpactDNA and it helps them 
decide what’s most important to them, financially and beyond. 
The assessment helps them to better understand their values and 
their beliefs, as well as to think about the types of impact they want to 
achieve and how they think about their wealth.
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Alongside our ImpactDNA™, we also invest in our clients’ knowledge 
and learning by providing time with experts in the field of sustainability; 
from our Chief Impact Officer and dedicated impact team to our 
Tribe fellows and external experts. Many of our clients are reliant on 
us knowing what the best interventions and solutions are for the issues 
we face as a global society and expect us to support them with a core 
team with experience in managing those issues.
Some clients are experienced impact investors but will still rely 
on us understanding their approach to the problem they want to 
tackle with their invested capital. Not only do we have to balance 
their needs but we must also be able to ensure that we execute the 
best strategy for them in creating that change and managing the 
consequences of those decisions – what we refer to as the ‘impact 
tradeoffs’. For example, often being too granular with one issue can 
create unintended consequences with other social and environmental 
issues if the decision-maker is not aware of the interdependencies 
that exist. We use the UN Sustainable Development Goals (SDGs) as 
the framework which guides our investments and through which we 
understand the changes that are required to create that safe space 
where everyone and Earth can thrive. We support this with systems 
thinking, where we recognize those relationships in the framework 
and understand the direct and indirect pathways to change, as well 
as the tensions that can sometimes exist. Here, we use the latestavailable social and environmental science to understand these 
issues as well as the work of Nilsson, Griggs and Visbeck. In this 
way, we can create a robust strategy that’s clear in its aims, meets 
the client’s requirements and offers full transparency to any impact 
tradeoffs.10 We explain these decisions to our clients and then set 
about executing and managing.
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the holy gra i l : i s i t poss ib le to ach ieve a l l th ree – the 
E , the S and the G? Which par t s o f the economy 
cur ren t ly o f fer the bes t oppor tun i t y to ach ieve a l l 
th ree? Can you ach ieve a l l th ree across an en t i re 
divers i f ied inves tment por t fo l io? How can you dec ide 
what i s an acceptable compromise for you?
Across asset classes and private and public markets, it’s possible to 
create a portfolio aligned to the UN SDGs: an investment portfolio 
that focuses on the environmental, social and governance related 
issues society collectively faces. However, it takes effort given the 
complexity referenced earlier. However, this may not be possible for 
every client given their risk profile and familiarity and/or experience 
with certain types of investment. As a wealth manager we always have 
to balance the desires of the client with what is right for them from a 
fiduciary perspective. This certainly doesn’t prevent us from enabling 
them to impact invest, but it might mean certain investment vehicles 
are not appropriate for them. Once we understand any specific 
restrictions, then we’re able to build their portfolio. If that means 
certain opportunities aren’t available for them in a thematic area of 
interest, then we can use systems-thinking and find an eligible vehicle 
that can support the change they seek indirectly. As a result, we talk 
more about adjustment and tolerance than compromise.
i s there a problem of scarce inves tment oppor tun i t ies 
in ESG? i s too much money going in to too few 
bus inesses and sec tors? Are there s igns tha t supply o f 
wel l -di f fe ren t ia ted inves tments i s improv ing? What are 
the ‘new’ areas inves tors should look ou t for?
There have been some clear winners in terms of investible themes in 
impact investing over the last few years, especially in public markets. 
Clean and renewable energy and technologies, the drive to electric 
vehicles, the circular economy, energy efficiency and sustainable 
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buildings, cities and communities, plant-based foods, healthcare and 
drug development (linked specifically to the Covid-19 pandemic but 
with ramifications for other diseases) and software and technology 
as a tool for communication, work and learning (again, largely 
facilitated by the Covid pandemic). Much of the activity has been 
linked to the climate, human health and waste crises. Arguably these 
are areas where it has been easier for the investor to get comfortable 
with the outcomes of the decisions they take given the data available 
for evaluation.
Areas where it’s more challenging, which means we’ve seen less activity 
to date, include education, where much of the critical intervention 
required is still in the realm of private market investing, philanthropy 
and/or the state.
Gender and racial equality has also not received the attention it needs. 
To date, this type of investing has largely been based on the operational 
footprint of a business and its investment into creating a supportive 
environment for diversity and inclusion to occur. In many of these 
strategies we see significant impact trade-offs where the business’s core 
product and service is overlooked in the pursuit of more operational 
metrics. Microfinance provides some exciting opportunities here, as 
do those companies specifically focused on tackling the issues that 
lead to gender and racial inequality and inequity.
Food quality and security is another interesting and currently 
underappreciated area of investment. Much of the agricultural and 
consumer-based disruption in this space is happening outside the 
realms of the public markets. Ecosystem services and the role of 
nature in providing us with a service, much like a business does, is 
a big new frontier in investing, like the low carbon transition. Our 
current unwillingness to understand the value of nature means we 
have overconsumed and breached the limits of what nature is able 
to tolerate. As the biodiversity crisis deepens, investors will have to 
embrace an entirely new way of investing to protect nature, and 
ultimately our life support system (like the transition we see underway 
T H E E S G I N V E S T I N G H A N D B O O K
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with climate investing). Given the last few years and the increasing 
awareness of the fragility of the finance system we’ve built and the 
profound dependency of it for a healthy planet and healthy societies, 
there are signs of a sizeable increase in product in the market for impact 
investors. The quality of these products, however, varies enormously.
We believe impact investing is just good investing. It’s a comprehensive 
approach to understanding the future fitness of a business to meet 
the changes underway socially, environmentally and economically. It’s 
about whether a business is part of the solutions we seek. With that in 
mind, it’s an active investment style that requires a deep knowledge 
of the relationships between the issues we face and a company’s 
performance on those. And even with the growing number of 
frameworks designed to support the finance industry to transition, it 
still requires effort and often a lot of translation. ●
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regula t ions 
and rat ings
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Regulat ion and voluntar y 
in i t iat ives
W e are entering a phase of ‘regulatory evangelism’ 
according to HerbertSmithFreehills, in a report on the 
impact of ESG on banking; this phase:
 “…is focusing on setting regulatory standards, the appeal of 
enlightened self-interest and calls to action, particularly on beefing 
up non-financial disclosures and building better understanding of 
firms’ climate exposures. But prodding and rhetoric will be soon 
replaced with the threat of enforcement and spectre of sanctions 
as a host of new requirements come in.”1
As one sustainability investment professional lamented: “It’s no 
fun anymore”.
Some sustainability challenges are global, some are national, some 
are local. The investment industry is global by its nature, even if 
asset managers are headquartered in one country. While they may be 
technically and legally subject to the investment rules of the country 
in which they mainly operate, naturally, as global investors their 
businesses will also be affected by policies and regulations in other 
parts of the world. UK pension funds only have a third of their equity 
holdings in the UK, according to the Investment Association.2
Some combination of global and national efforts, by both governments 
and government-appointed bodies as well as regulators, such as the 
Financial Conduct Authority and Prudential Regulation Authority, are 
therefore required, as Ingrid Holmes of the Green Finance Institute 
points out in her interview later in the chapter. The hope is that they 
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cohere into a consistent set of guidelines and requirements that can 
be applied across borders.
As little as five years ago, the UK Government and regulators had taken 
a largely hands-off approach to ESG investment. However, as global 
agreements on climate change targets have formed and the need for 
countries to report on progress has emerged, the importance of the 
investment industry and its trillions under management to this effort 
has become apparent. As a result, thereare now more requirements 
than ever on asset management firms to disclose, report and make 
clear progress on climate-related issues in particular.
Matching the frequency with which new regulations and standards 
for sustainability are popping up around the globe can seem, as Julia 
Groves puts it: “like changing the wheel in a car that’s going at 60 
miles an hour.”
The result of this on-the-go wheel changing is a substantial degree 
of overlap among a range of initiatives. For example, a document 
published by the Chartered Financial Analysts (CFA) Institute 
explaining the overlap between its voluntary ESG standards and those 
of the EU Sustainable Finance Disclosure Regulation, (SFDR for 
short) runs to 14 pages.3
Many large investors themselves want greater standardisation of efforts 
and guidelines, recognising the climate threat to their existence. A 
good example of this is the investor-led group, Climate 100+, which 
was formed in 2017 and now has 617 investor members across five 
regional, global networks, managing $16trn of assets.
However, there is also growing recognition and no doubt some anxiety 
over the huge amount of work and resources that investment firms 
must now devote to meeting, and ideally exceeding, new regulations 
and guidelines.
Regulation in ESG has gone into overdrive in the last couple of 
years, driven in part by the need to eliminate greenwash from the 
markets (not a trivial thing, as Keith Davies explained in Chapter 
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3), but also to address the wider urgent goal and get all investment 
organisations pulling in the same direction on carbon emissions and 
reaching net zero.
As Julia Groves says: “The purpose of the regulations, particularly in 
Europe, is to try and introduce some consistency in the market so 
that we can use the same terms and compare apples with apples. But 
they’re primarily there to avoid greenwash.”
Climate issues have been the focus of regulatory efforts so far, although 
it is hoped that over time, these standards will be revised to include 
other parts of ESG. EU-wide regulation in the form of the SFDR was 
published in 2019, with much of the legislation coming into force 
in March 2021.
The rules state investment firms now have to have policies on the 
integration of sustainability risks in the investment decision-making 
process, implement due diligence to address adverse impacts or 
explain the reasons why it does not consider impacts, and update 
remuneration policy to include information on how it is consistent 
with the integration of sustainability risks.
The new rules require additional disclosures for any product that 
promotes environmental or social characteristics, has sustainable 
investment as its objective or has a reduction in carbon emissions as 
its objective.
Separately, much hope is pinned on the EU Taxonomy and the ability 
of other countries to adopt the definitions of sustainability it has 
consecrated. The Taxonomy Regulation was published in the Official 
Journal of the European Union on 22 June 2020 and entered into 
force on 12 July 2020.4 It sets out four conditions that an economic 
activity has to meet in order to qualify as environmentally sustainable.
The Taxonomy Regulation establishes six environmental objectives:
1. Climate change mitigation
2. Climate change adaptation
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3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems
As part of the same package of legislation, the EU introduced a 
proposal for a Corporate Sustainability Reporting Directive (CSRD). 
This proposal “aims to improve the flow of sustainability information in 
the corporate world. It will make sustainability reporting by companies 
more consistent, so that financial firms, investors and the broader 
public can use comparable and reliable sustainability information”.5 
As a result, all large companies and all listed companies – nearly 
50,000 in the EU – need to follow detailed EU sustainability reporting 
standards. The Commission proposed separate, proportionate 
standards for SMEs, which non-listed SMEs can use voluntarily.
These European rules may provide a framework for regulations in 
other regions over time, and potentially become more demanding 
and cover more areas over time. Groves says:
“Most large funds have multiple, international investors. And 
most large investors have their money in international funds. So 
a reasonable proportion of the large scale investment universe is 
already having to get their heads round SFDR and isn’t really going 
to want to do this again, with the UK side of things. So let’s hope 
there’s some consistency in there.
“Initially the first release of SFDR was very focused on climate, 
adaptation and mitigation. Before it gets into the broader 
sustainability things, it’s nice starting to bring some of those further 
forward, I think we all see that climate is the Trojan horse before 
getting into broader sustainability issues. That’s because climate is 
more measurable and has a degree of urgency and international 
support. So climate standards can come first and then after, 
attention can turn to processes, behaviours and structures and 
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then pull in more of the social and governance factors as and when 
appropriate.”
Over the coming months, attention is likely to focus on efforts across 
the Atlantic, where the US Securities and Exchange Commission 
(SEC) has begun to consider what it can do to deal with greenwash, 
with the aim of “facilitating the disclosure of consistent, comparable, 
and reliable information on climate change”.6 This may be one area 
in which the EU leads, and the US follows.
One reason that standardisation and cross border regulation is 
considered so important now is to overcome some of the confusion 
that has arisen as a result of ratings agencies giving conflicting 
information based on different metrics and standards, discussed later 
in this chapter. As Julia Groves suggests:
“In the absence up to now of government regulation, a number 
of third parties have sprung up, from your Sustainalytics and 
your MSCI to your Moody’s ratings. Organisations trying to 
give investors some assurance that environmental, social and 
governance factors have been considered. What the SFDR is now 
asking for is more of a focus on actual targets and metrics and 
standardised measurement.”
But amid this torrent of rules, voluntary standards and guidelines, it 
should be remembered that regulation is not the whole picture. As 
Alex Edmans writes in Grow The Pie:
“Regulations only lead to compliance, not commitment. A company 
can meet minimum wage laws without providing meaningful work 
or skills development.”
We may move fairly swiftly toward holding companies to account 
not only for how they adhere to the letter of the law, but also its spirit. 
Creating the regulations will give way to vigilance and monitoring, as 
well as convictions and fines for those overstating their case.
We have seen the first investigation by the Competition and Markets 
Authority over green claims in the fashion sector this year. Opened in 
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January 2022, the review looks at whether retailers are complying with 
consumer protection law, following the publication of the CMA’s own 
code on green claims in September 2021.
We have seen the first cases of greenwash going through the courts 
and there remains a good deal of uncertainty about the outcome, 
but a faithful willingness to give the process a go. As Anastasia 
Petraki, investment director of sustainability at Schroders, the asset 
management firm says: “We all have to climb a steep sustainability 
learningcurve not knowing what is on the other side.”7
Summar y of developments in 
regulat ions, mi lestones and 
s tandards in the last year
The following is not an exhaustive list but designed to give a flavour of 
the scale and scope of some of the recent regulatory changes.
Ju ly 2020
The Taxonomy Regulation enters into force on 12 July 2020, creating 
the world’s first ever ‘green list’ – a classification system for sustainable 
economic activities.
december 2020
The Official Journal of the European Union introduces three new 
climate-focused Benchmark Regulations, to increase transparency and 
the disclosure of sustainability information, making the comparison 
of different financial products easier.
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March 2021 (draf ted 2019)
SFDR – Sustainable Finance Disclosure Regulation – an EU-wide 
initiative to regulate the disclosure of pre-contractual documents 
information on whether and how products consider sustainability 
risks comes into force. Product manufacturers and advisers have 
to disclose information on the integration of sustainability risks in 
investment decision making or the investment advice process, as well 
as information on how remuneration policies are consistent with 
the integration of sustainability risks. There are obligations for asset 
managers to make ESG data publicly available.
Apr i l 2021
The EU Taxonomy Climate Delegated Act classifies which activities best 
contribute to mitigating and adapting to the effects of climate change.
The Corporate Sustainability Reporting Directive ensures companies 
provide consistent and comparable sustainability information.
Six amending Delegated Acts ensure that financial firms, such as 
advisers, asset managers or insurers include sustainability in their 
procedures and their investment advice to clients.
September 2021
The UK Competition and Markets Authority publishes a ‘Green 
Claims Code’, including the following six principles:
1. Claims must be truthful and accurate. 
2. Claims must be clear and unambiguous. 
3. Claims must not omit or hide important relevant information. 
4. Comparisons must be fair and meaningful.
5. Claims must consider the full life cycle of the product or service.
6. Claims must be substantiated.
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october 2021
The UK Treasury publishes ‘Greening Finance: A Roadmap to 
Sustainable Investing’, setting out how the UK Government plans to 
green the financial system in three phases, as follows:
• Ensure information on sustainability is available to financial market 
decision-makers.
• Mainstream this information into business and financial decisions.
• Shift investment to align with a net-zero and nature-positive economy.
Phase one of its plan is to ensure “decision-useful information 
on sustainability is available to financial market decision-makers”. 
The Treasury laid out that its plans will focus on the reporting of 
consistent information, streamlining existing requirements such as 
TCFD (see below), being consumer-focused and the ability of firms 
to substantiate claims in line with the UK Green Taxonomy and with 
international standards. 
november 2021
The CFA Institute publishes its Global ESG Disclosure Standards for 
Investment Products. 
The International Sustainability Standards Board is set up by the 
IFRS Foundation, “to deliver a comprehensive global baseline of 
sustainability-related disclosure standards that provide investors 
and other capital market participants with information about 
companies’ sustainability-related risks and opportunities to help 
them make informed decisions.”8 The IFRS Foundation is a not-
for-profit organisation set up to establish a single set of high-quality, 
understandable, enforceable and globally accepted accounting and 
sustainability disclosure standards – IFRS Standards, in conjunction 
with the International Accounting Standards Board (IASB) and the 
International Sustainability Standards Board (ISSB). IFRS Accounting 
Standards set out how a company prepares its financial statements. 
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IFRS Sustainability Disclosure Standards set out how a company 
discloses information about sustainability-related factors that may 
help or hinder a company in creating value.
The UK regulator FCA creates its Sustainability Disclosure 
Requirements.9 These standards and regulations apply to FCA-
regulated firms and require:
• Sustainable investment labels.
• Consumer-facing disclosures for investment products.
• Client- and consumer-facing entity- and product-level disclosures 
by asset managers and FCA-regulated asset owners.
Other key in i t iat ives
A number of initiatives, alliances and independent organisations have 
been set up to research, inform and complement official measures 
and policies, as well as galvanise action. This list is not exhaustive, but 
designed to give a picture of the range of organisations established 
over recent years, with common goals.
tCFd – task force for Cl imate re la ted F inanc ia l 
d isc losures
Established in 2017 to provide a framework for disclosures, endorsed 
by 2,600 companies by the end of 2021.
tnFd – task force for nature -re la ted F inanc ia l 
d isc losures
Established in 2021, its role is “to establish and promote the adoption 
of an integrated risk management and disclosure framework that 
aggregates the best tools and materials” and “promote worldwide 
consistency for nature-related reporting”.
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GFi – Green F inance ins t i tu te
Established in 2019 and working across public and private sectors, 
with a mission “to accelerate the transition to a clean, resilient and 
environmentally sustainable economy by channelling capital at pace 
and scale towards real-economy outcomes that will create jobs and 
increase prosperity for all.”
GFAnZ – Glasgow F inanc ia l A l l iance for net Zero
Founded by Mark Carney and Nigel Topping in 2021, the initiative 
has rallied commitments from 450 firms across 45 countries, which 
between them can deliver the estimated $100trn of finance needed for 
net zero over the next three decades.
the net Zero Asse t Managers in i t ia t ive
Formed in December 2020, it has signatories representing $57trn 
in assets under management – almost half of all the assets being 
managed globally. The 220 signatories have committed to a goal of 
net-zero greenhouse gas (GHG) emissions by 2050, and to manage 
client assets with this goal.
Science -based targets in i t ia t ive
sciencebasedtargets.org
the un-Convened net Zero Asse t owners Al l iance
www.unepfi.org/net-zero-alliance
un Global Compact
www.ung loba l compac t .o rg/ take - ac t ion/ac t ion/pr i va te -
sustainability-finance
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un Pr inc ip les o f respons ib le inves tment 
www.unpri.org
unEP F inance in i t ia t ive
www.unepfi.org
Are ESG rat ings rel iable?
It’s widely agreed that measures, rankings and ratings are crucial to the 
exercise of fully integrating ESG considerations into the investment 
process. Although even here, dissent is crystallising.
Ashley Hamilton Claxton, Head of Responsible Investment at Royal 
London Asset Management, says: 
“This need to professionalise and measure everything is very 
important, but you can miss the point. We need to be careful with 
what we are measuring and why and what you want to do with that 
information.
“Sustainability is complex, it’s Environmental, Social and 
Governance mixed together, it’s about existing incentives, it’s 
about existing socio-economic political systems, it’s about trying to 
create change with human beings who don’t like to change. It’s so 
complex. So I really don’t think that just measurement is going to 
do it. You ultimately need judgment; human beings sittingdown 
and discussing and having conversations.
“This focus on data. Is it good? Is it bad? Why does everyone 
disagree? Heaven forbid MSCI disagree with Sustainalytics. I’d 
actually be worried if they agreed, to be honest, because it’s opinion 
really, not data.”
What doesn’t help is that there isn’t always agreement on what the 
ratings are between those doing the ratings. Wherever there is an 
attempt to categorise and define, there is room for error and dispute 
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emerges. The truth may be out there, but whenever there is an attempt 
to grasp it, it slips further away.
As an OECD paper on ESG finds: “ESG ratings vary strongly depending 
on the provider chosen, which can occur for a number of reasons, 
such as different frameworks, measures, key indicators and metrics, 
data use, qualitative judgement, and weighting of subcategories.”10
Why rat ings d i f fer
An analysis by the CFA Institute published in August last year found: 
“Different ratings methodologies tell vastly different stories about 
the same company. This demonstrates the immaturity of the 
current ESG ratings environment and highlights the need for 
improvements.”11
Sasha Beslik, financial sustainability expert, put it damningly: “The 
current ESG ratings provide a space for comfortable oblivion and are 
not supporting the systemic shift we need.”
Philip Morris, a US tobacco company, promising a ‘smoke free future’ 
and appearing on the Dow Jones Sustainability Index, more than 
raised eyebrows last year. It prompted a far deeper examination of 
what the ratings are based on. As an article in the Stanford Social 
Innovation Review explained neatly: 
“At the core of the problem is how ESG ratings, offered by ratings 
firms such as MSCI and Sustainalytics, are computed. Contrary to 
what many investors think, most ratings don’t have anything to 
do with actual corporate responsibility as it relates to ESG factors. 
Instead, what they measure is the degree to which a company’s 
economic value is at risk due to ESG factors. For example, a 
company could be a significant source of emissions but still get 
a decent ESG score, if the ratings firm sees the pollutive behavior 
as being managed well or as non-threatening to the company’s 
financial value. This could explain why Exxon and BP, which pose 
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existential threats to the planet, get an average (“BBB”) aggregate 
score from MSCI, one of the leading rating companies.”12
The following summary of the problems with existing ESG ratings is 
taken from a 2021 report by UTIL, the financial technology provider, 
which describes the area as ‘a house of cards’:
• Social and environmental impact is unaccounted for. Most ratings 
don’t measure a company’s impact on ESG factors. They measure the 
impact of ESG factors on a company’s value. ESG investing centres 
on minimising risk: a tobacco company might enter a sustainability 
index despite its product killing 8,000,000 people annually.
• Ratings are relative and arbitrary. First, patchy information subject 
to human analysis yields significant variability between ratings. 
Second, ESG factors are aggregated, meaning companies may 
receive above-average ratings despite harming subset stakeholders. 
Third, companies are rated relative to their sectors, making criteria 
generous and like-for-like analysis impossible. 
• Companies are judged on what they say, not what they do. Ratings 
are informed by (selectively disclosed) operations and policies. Not 
only is the data unreliable, but also require corporate resources. 
Unlike financial metrics, which are a consistent, reliable measure 
of company value no matter the size or region – a strong ESG score 
is the reserve of large-cap companies.
Not only is the fundamental basis of current ratings methodologies 
questionable, they don’t agree. The CFA Institute research compared 
MSCI, S&P, Sustainalytics, CDP, ISS and Bloomberg ratings and 
looked for agreement or correlation between the six different ratings 
methodologies and results tested. The correlations were revealed to be 
surprisingly low almost across the board, with the highest correlation 
between Bloomberg and S&P at 74.4% and the lowest between CDP 
and ISS, at 7%. The results are shown in Figure 37.
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Figure 37: ESG ratings comparison – correlations
MSCI S&P Sustainalytics CDP ISS Bloomberg
MSCi 35.7% 35.1% 16.3% 33.0% 37.4%
S&P 35.7% 64.5% 35.0% 13.9% 74.4%
Sustainalytics 35.1% 64.5% 29.3% 21.7% 58.4%
CdP 16.3% 35.0% 29.3% 7.0% 44.1%
iSS 33.0% 13.9% 21.7% 7.0% 21.3%
Bloomberg 37.4% 74.4% 58.4% 44.1% 21.3%
Source: Bdo uSA, llP
Low correlation doesn’t necessarily indicate a worse ratings system, just 
as better standardisation doesn’t necessarily indicate that the ratings 
agencies showing higher correlation have got it right. The analysis 
doesn’t go as far as suggesting which are better or worse, just which 
agree more and less.
But the problem of a lack of agreement between ratings providers 
has implications besides confusing and demoralising investors seeking 
genuine ESG. Sometimes, a ratings provider’s approach leads to some 
unexpected results. It has been known for pure positive impact funds 
to score less well against some measures than funds that have fossil 
fuel holdings, for example, indicating some fundamental flaws in the 
metrics used by some of the biggest ratings providers.
This could lead to well-meaning money fundamentally being 
misdirected into activities that do not represent good ESG practices, 
but have been erroneously given that label; as well as some firms that 
are extremely good at ESG not being highly rated and so missing out 
on the money that is seeking it out.
So are ratings worth the paper they are written on?
This is the million dollar question. To a degree, it depends what you 
are measuring.
There are measurements of quality and measurements of quantity. 
With the former, there is subjectivity, whereas quantity measurements 
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are more objective. Quantity measurements are also easier in some 
areas of ESG than others. Measuring and reporting on carbon 
emissions is now far easier than, for example, measuring progress 
towards an inclusive culture in the workplace.
In general, environmental factors are easier to rate, governance a 
little harder and social harder still. But to complicate matters, not all 
environmental factors are easy to measure. Carbon emissions is one 
thing, but use of materials in long supply chains may be harder.
When considering social impacts, it gets tougher, as we have explored 
in detail in Chapter 2.
On governance, it could be argued that the measurable aspects – the 
processes of committees and meetings, executive pay ratios, diversity 
targets and reporting, are the least revealing part of the assessment. 
Employee surveys and staff churn may be better assessments of whether 
a company is getting its governance right.
The gap between what a company says and what it does may increasingly 
be viewed as a governance metric when considering the risk of 
purpose-wash and the need to be authentic, as well as the reputational 
risk presented if companies allow the gap between saying and doing 
to become too wide.
Ratings are clearly a vital part of the puzzle and huge amounts of 
excellent work is being done by providers – much of which is cited in 
the pages of this book – but set too much store by the analysis of any 
one agency and your investments may not end up doing as much ESG 
as you think they are doing.
A rating is also not set in stone. Companies change, executive board 
members move on, responses to regulations evolve; some catch up 
and move ahead, other former pioneers may fall behind. So this lack 
of consistent agreement between ratings providers is partly a resultof 
the rapid evolution of ESG and data science, but also market forces and 
the natural ebb and flow of performance at individual companies. And 
let’s not forget that ratings providers don’t necessarily want to agree, 
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they must compete with each other and have unique selling points 
which make their ratings data the most reliable. If there is competition 
to be the best, then agreement is not necessarily the end game.
Disagreement is also partly caused by the degree to which the 
companies that funds invest in can disclose, report and engage to 
the extent required by a ratings provider. ESG ratings can tend to 
shine a more favourable light on larger companies, which have more 
resources and bigger teams available to deliver the information by 
which they can be assessed. Given the inherently indefinite nature of 
the factors being measured – they are externalities, after all – there is 
a large amount of room for debate in this area.
The impor tance and chal lenge of t ransparency
An ESG rating can only be as good as the data it is based on, which 
brings us to transparency.
Like company culture, transparency is a lodestone of ESG. As Julia 
Groves says: 
“Transparency disclosures are the basis of better decision making, 
and more alignment between companies and their investors. 
There’s a big focus on disclosure, which is right, because in a lot of 
situations, it’s the lack of transparency that has led to investors’ and 
companies’ interests falling out of alignment. Company boards 
need more transparency to make better decisions.”
If it is universally agreed that transparency is vital, what’s the issue 
with all companies and asset managers delivering it? Cynically, there’s 
a question to answer around whether some parts of a business’s 
activities or an asset manager’s portfolio are being deliberately kept 
out of view. Less cynically, it may be a simple and genuine question 
over the ability of a company to devote time and resource to making 
information transparent and freely available. The will among industry 
professionals to be more transparent may be there, but the budget may 
not. This is one of the reasons regulators are stepping in – to deliver 
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the stick approach to transparency where the carrot did not prove 
sufficiently tempting. Increasingly, the unforgiving but reasonable 
view is that where there is a will to be transparent, it should be possible 
to find a way.
Some of the b igges t ra t ings agencies/providers
• Arabesque Partners
• Bloomberg
• CdP
• Climetrics 
• FtSE russell (FtSE4Good)
• iSS
• Moodys
• Morningstar
• MSCi
• refinitiv
• S&P Global
Top-rated asset managers for ESG
With all of the above caveats to ratings and scoring systems in mind, 
but also with a need to provide actionable information within these 
pages, below are the top ten asset managers for ESG commitment 
and brand globally, as ranked by the H&K Responsible Investment 
Brand Index:
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top 10 asse t managers in the ‘avant gardis t ’ ca tegor y
1. Axa Investment Managers
2. Federated Hermes
3. Candriam
4. Degroof Petercam AM
5. Sycomore Asset Management
6. Etica SGR
7. Mirova
8. BNP Paribas Asset Management France
9. Le Banque Postale Asset Management
10. MFS Investment Management
Source: H&K responsible investment Brand index 2021, www.ri-brandindex.org
Commitment and brand may be two metrics, but what about the 
underlying assets under management? 
Based on an assessment of stewardship, transparency and governance 
among the world’s 75 biggest asset managers, ShareAction produced 
the rankings shown in Figure 38.
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Figure 38: Top and bottom asset managers for ESG
top 10 asset managers for ESG
Rank Asset manager Rating AuM ($bn)
1 robeco A 193.25
2 BnP Paribas Asset 
Management
A 683.12
3 l&G investment Management A 1,329.05
4 APG Asset Management A 568.32
5 Aviva investors A 477.45
6 Aegon Asset Management BBB 381.65
7 Schroders BBB 571.39
8 nn investment Partners BBB 236.21
9 M&G BBB 474.43
10 PGGM BBB 261.57
Bottom 10 asset managers for ESG
Rank Asset manager Rating AuM ($bn)
1 Bradesco Asset Management E 185.46
2 MEAG E 302.94
3 Mellon investments 
Corporation
E 569.27
4 vanguard E 4,907.45
5 dimensional Fund Advisers E 576.64
6 JP Morgan Asset Management E 1,765.27
7 Credit Suisse Asset 
Management
E 396.18
8 Fidelity investments E 2,403.65
9 Metlife investment 
Management
E 586.93
10 E Fund Management E 190.76
Source: ShareAction
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Five minutes wi th Ingr id Holmes, 
d i rec tor of the Green F inance 
Ins t i tu te and chair of the Green 
Technical Advisor y Group
What has the Green F inance ins t i tu te 
been se t up to do and what i s i t 
cur ren t ly doing?
We are driven by the global agreement 
to keep temperature increases to no 
more than 1.5°C and to try and build a 
resilient society. To achieve this, sectoral 
transformation is required across areas 
such as infrastructure, transport and 
agriculture. There are lots of barriers 
in the way and the market just isn’t 
structured to do this. Financial market 
players will have short-term incentives and 
don’t have the time or space within their 
organisations to work through these barriers and 
come up with solutions.
But the team at the GFI, because we’re backed by the government 
and the City of London, can do this. So we bring financial expertise 
to address issues that have stalled, such as the energy efficiency in 
buildings coalition. We also bring our expertise to bear on new 
investment focuses like nature or transport electrification. And we 
convene different stakeholders to develop pilot solutions to address 
the barriers.
For example, our work on the green home loan principles, which are 
designed to build confidence in the market. But we also look at some 
of the data issues around developing these solutions.
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The work we do through coalitions can be granular. Besides the 
coalition on energy efficiency in buildings, we have another in 
transport and we’ve just launched one on nature. We’re also doing 
work on sustainable infrastructure in Africa and are involved in a 
number of green financial market initiatives. One of them is the green 
taxonomy in the UK: a set of different definitions of what ‘green’ is 
that the market can use to address greenwashing but also to deploy 
capital where it’s needed to deliver on the net zero transition. We also 
run the Secretariat for the Task Force on Nature-Related Financial 
Disclosures and the Integrity in Voluntary Carbon Markets Initiative, 
and both of those are global.13
Are there any pr ior i t y areas?
Those identified as scientifically important – the transformational 
areas where we need to deploy more capital. But the other areas are 
those we are looking at because previous initiatives have got stuck.
We’re using the UK as a kind of lab. We want to develop solutions 
here and then deploy them elsewhere. So we started doing that with 
our energy efficiency in buildings initiative. But we’re constantly 
approached by government to look at other areas. So things like steel 
manufacture and hydrogen production, these are all going to be 
rolled out as the important next stages of that net zero journey.
How is the Green F inance ins t i tu te funded?
It was seed-funded by government and that grant is matched by the 
City of London. This helps form the basis of a structured institutional 
link between the public and private sectors, to get these conversations 
moving. But most of our funding now comes from philanthropy, 
to support the different programmes that we’ve gotunderway, so 
it’s a mixture.
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How do you work wi th the FCA?
We have close links to all government and regulatory institutions. 
Somebody from the FCA sits on our advisory board, as does somebody 
from the PRA. The two are very actively involved right now in relation 
to the green taxonomy in the UK, to deal with greenwashing and 
direct capital to our net zero economy, which is in the remit of the 
FCA. There will be a role for taxonomy reporting in substantiating any 
green fund claims. Things are moving so fast.
What do you th ink wi l l happen to ra t ings agenc ies as a 
resu l t o f the in t roduc t ion of the green taxonomy?
It’s possible they will be disintermediated. The challenge with 
sustainability data in the market now is that the different agencies 
out there have different methodologies and philosophies around 
how they describe and determine controversial or non-controversial 
activities. And so you have a ‘buyer beware’ situation, in that you need 
to be clear that you are buying somebody’s subjective view. It’s not like 
using financial data, where people are following some rules.
When I worked for an asset manager, we used 12 different data sets, 
and we were an active manager, and we would look at those and try 
to understand what was going on. So it was a case of purchase and 
interpret, which I think is the right way to go. A lot of asset managers 
don’t do that. They might just buy one or two data sets and just go with 
where the ESG is most integrated. So you’ve got to look at what people 
are actually doing with that data.
With things like taxonomy reporting, these will be much harder and 
faster indicators of impact, because they’re about demonstrating the 
economic activities you are investing in are actually green. So it’s not 
process based, it’s outcome based, and that’s just more objective and 
less subject to interpretation.
I think potentially the big game changer here is actually the EU’s 
proposals for a single access point for sustainability data. So the idea 
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is that all large companies put their data on a public database, a free 
point of access in the same format, so you can search and you can 
compare. That potentially does disintermediate some of the ratings 
players, but my sense is that is still going to be very time consuming for 
people to use, and therefore, many firms will still choose to buy data 
in a packaged, digestible and automated form. So it’s not entirely clear 
what will happen with these organisations. What is clear is that I think 
there’s going to be much more scrutiny over what they’re doing and 
how they’re coming to the opinions that they’re coming to.
Are disc losures becoming more cons i s ten t?
Yes. So you’ve got five different voluntary frameworks – big ones – and 
then there’s a whole load of other ones as well. So the big question for 
corporates is, which one do I use? They can’t use all of them. There 
are actually sustainability reporting consultants helping companies do 
the best reporting so they can get the best scores.
This is a challenge. It’s why the International Financial Reporting 
Standards Foundation (IFRS) has said it will consolidate the big five 
voluntary frameworks. They’ve got them around the table, and just 
come up with one standardised approach. So we are going to start to 
see some standardisation there. And I think that will help.
Are a l l aspec ts o f ESG measurable? Are some th ings 
more qual i t y than quant i t y?
It’s important to also look at what the strategy of any fund is, or 
any business. If you look at prospectuses, they’re so vague on what 
they’re actually trying to deliver, what they’re looking for, and their 
accountability to the client, it’s pretty meaningless. There’s a lot that 
could be done to tighten up expectations there. The French regulator 
is going quite hard on what’s in both the legal documentation and 
the marketing as well. But as this space gets more prescriptive and 
regulated, I think there is still room for fund managers to have a long- 
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term view on what might constitute positive new business activities in 
the market that go outside what, for example, a taxonomy might be 
describing. I think they need to be confident to do that, but equally, 
they need a competent counterparty on the client side to understand 
what they are doing. This is perhaps more likely to be an institutional 
client than an individual investor.
Are there disadvantages to smal ler f i rms in hav ing to 
meet the new requi rements?
Yes, massive costs. This could result in greater consolidation, because 
the costs of compliance in using data are just going up and up and 
up. If data access was free of charge, that would significantly reduce 
system costs. This could also lead to an increase in costs for active 
fund management. Active management had gone out of favour as 
the growth of cheap, passive tracker options had made it hard for 
active managers to compete. This could reverse if people see that the 
higher charge for active management reflects better data and better 
ESG investments. I think we could also see a lot of passive investment 
houses moving back into the active space.
How quick ly can we get to a p lace where a l l 
inves tment i s jus t green?
Well, if we don’t, life as we know it is over. It doesn’t mean all investment 
has to be green, however, it means that it is not doing harm to climate 
and the environment. So there might be some grey stuff in there, as 
well as green stuff, because that’s enabling infrastructure.
The other consideration here is the importance of engagement. 
What we need to see is these regulations being successful in using 
disclosures to drive awareness of the importance of considering ESG 
factors, which just hadn’t been happening across most of the market 
till now. So that will drive massive operational change.
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Once the ESG risks are understood, they then need to be managed. So 
the two routes are to divest, which comes with its own issues, but then 
also to engage with companies, using shareholder power and client 
relationships to work with companies on their own transition plans, 
because that’s how we deliver decarbonisation of the economy.
These disclosures and increase in awareness will also create new 
opportunities to invest. We can’t have all companies responding to the 
green imperative by shrinking in size; we expect companies to ‘grow 
to green’, which is really what GFI is here to achieve.
What are the opportunities to grow to green? One set of opportunities 
is around these new markets that we’re working with government 
and financial institutions to create. But also, I think there’s a really 
important role for bankers and insurers, as well as the primary capital 
markets in the asset management world. So venture capital, private 
equity, infrastructure investors, working with clients on their own 
transition plans and providing finance on the basis that they’re starting 
to deliver that. This is where sustainability-linked loans also come in, 
by starting to link delivery of environmental milestones to the cost of 
capital or indeed access to capital. That’s a really interesting area in 
the banking space, which is potentially really transformative.
It is far more constructive to talk about linking capital access to 
performance. There’s some great examples of this happening. ING 
has been doing some really interesting deals, for instance, a revolving 
credit fund linked to delivery of sustainability targets. Sustainable 
businesses are now seeing banks basically competing to give them 
capital, free of charge, because they’re taxonomy aligned. So there’s 
a lot of attention now on green asset ratios and howthat governs who 
banks will lend to. This is what we want. We’re now starting to get to 
the holy grail, which is when you start to see sustainability priced into 
the cost of capital. That’s happening.
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As a resu l t o f regula t ions , i s demand for ESG lending 
and inves t ing oppor tun i t ies ou ts t r ipp ing supply? i s the 
consequence of th i s a bubble?
Yes, this is happening. Active managers are the price makers in the 
markets and if they’re doing their job well, they will be factoring 
environmental, social and governance performance into how they 
value companies. Then if you look at the passive sector of the market, 
the price takers, I think this is where there is some experience of a 
bubble. If you talk to any well-informed, fundamentally active investor, 
they won’t overpay for companies, so then they’re riding the wave, 
because they were probably in there already.
I think this passive bubble will settle. But it does underscore this point 
that we need to create more pipeline. And this is where I think if the 
banks want to do more financing of green activities, they can make 
that happen through talking to their clients about what they’re doing 
on their capital and expenditure planning, and how debt finance can 
support that.
Are banks genera l ly doing enough to commi t to green?
$130trn in assets under management with some of the largest banks 
around the world committed to GFANZ at COP26, including Lloyds, 
Barclays, NatWest, HSBC and Santander. The first step for them 
is making the pledge. The second step is to say “OK, what are our 
policies?” And I think this is where the rubber hits the road.
A lot of them at the moment are just doing the mapping of current 
assets under management, understanding where the heat points are, 
and then looking at what they might do to address that. They have to 
get the operational pieces in place. The banks that signed up have 18 
months to come up with policies and targets.
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What ’s coming soon?
The reorganisation of GFANZ.
The US – in particular the Securities and Exchange Commission (the 
SEC) – a massive market – could be looking at taxonomy. The US 
doesn’t usually do anything prescriptive so this is potentially game-
changing. It will be looking at the issue of greenwashing.
Are China and india br ing ing the ESG ef for t down?
Taxonomies are being developed globally and there are calls for a 
global taxonomy. It won’t work for the same reason we don’t have a 
global carbon price. These are national jurisdiction issues. We could 
get to some sort of harmonisation in the medium term but in the short 
term, countries have different views on technology, there are forks in 
the road and a heterogeneous environment but the taxonomies are 
another litmus test for China and India.
Where do the new col lec t ive in i t ia t ives leave the o ld 
ones?
The world is moving on very quickly and it is not enough to have nice 
sentiments. It’s all about impact now and that requires a greater level of 
accountability. An activist role is now needed from all organisations. ●
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Figure 39: The majority of asset managers demonstrate a 
substandard approach to responsible investment
24
22
20
18
16
14
12
10
8
6
4
2
0
n
um
be
r o
f m
an
ag
er
s
rating band
AAA-A BBB-B CCC-C d E
Figure 40: Total AUM for each rating band
The combined AUM of those managers with a D or E rating is $36trn 
– greater than the GDP of the US and China. They account for 64% of 
the total AUM assessed.
22
20
18
16
14
12
10
8
6
4
2
0A
ss
et
s u
nd
er
 m
an
ag
em
en
t (
u
S$
 tr
ill
io
n)
rating band
AAA-A BBB-B CCC-C d E
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Figure 41: The world’s six largest managers with associated 
rating band
Blackrock
vanguard
State Street Global Advisors
Fidelity investments (FMr)
Capital Group
J. P. Morgan Asset Management
Asset Manager Rating AUM (US$ billion)
6377.75
4907.45
2779.52
2403.65
1805.02
1765.27
D
E
D
E
D
E
Source: Share Action ‘Point of no returns’ report, shareaction.org/reports/point-of-
no-returns-a-ranking-of-75-of-the-worlds-asset-managers-approaches-to-responsi-
ble-investment
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Grassroots 
and People 
Power
C
H
A
P
TE
R
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t op-down changes from governments, regulators and other cross-
border institutions are critical to moving the dial in favour of 
ESG becoming the default way things are done and giving it 
more influence over the contribution of the investment industry to 
environmental and social betterment.
But the people to whom all the money belongs – you and me, our 
parents, other relatives and friends – also have influence, and our 
views and wishes are important. The demand-side of the ‘where to 
invest’ equation is that investment providers are under pressure to 
create the products that people want for their pensions and ISAs: 
planet- and people-friendly investments that also deliver returns.
According to research from EQ Investors, two-thirds of investors aged 
under 40 consider a company’s goals, mission and purpose when they 
make their decisions, with four in five feeling frustrated when they see 
companies behaving in a way they deem unethical.
Nearly three-quarters are concerned about environmental issues, 
three in five worry about equality, and two-thirds have concerns about 
poor corporate governance practices, according to separate research 
from Aegon UK.
“Be a net zero hero!” and “take the 21x challenge!” are the calls to 
action that you will be asked to make should you visit the website of 
Make My Money Matter, the campaign set up by filmmaker Richard 
Curtis to ignite interest among the general public in what their 
pensions are funding and alert them to the possibility that it might 
be backing things like oil, coal, gas and tobacco, which you might not 
choose to support with your own money, were you offered the choice.
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The Make My Money Matter campaign was launched in 2020 and has 
had a big impact, however it was not the first campaign to connect the 
dots for people between their money and the activities it is financing 
through pensions, ISAs and bank accounts. Rather, it is the latest 
in a line of campaigns from organisations wanting the finance and 
investment industries to better represent the values of the people 
whose money they are ultimately using.
Good Money Week, which was started by the UK Sustainable 
Investment and Finance Association (UKSIF) in 2005 as ‘National 
Ethical Investment Week’, takes place every October and champions 
all the ways individuals can use their money to make a difference.1
Positive Money, the money reform group, was founded in 2010 in the 
aftermath of the banking crisis, amid a desire to see the function of 
money restored to supporting a fair and sustainable economy.
In 2012, partly in response to the financial crisis and the ensuing 
mistrust of – and desire to avoid – big high street banks, the campaign 
Move Your Money was formed and encouraged people to move their 
bank accounts to ethical alternatives. ShareAction was founded in 
2005 as a campaign group for greener pensions and has continued 
to challenge the investment industry and inspire shareholders since 
then. Good With Money, the ethical and sustainable personal finance 
website, was founded by this author and Lisa Stanley in 2015 and 
continues to offer a useful resource for people wanting to make more 
sustainable choices with their money.2
The birth of crowdfunding and innovative finance models which 
enable, amongother things, local community renewable energy 
projects to raise finance directly from people rather than from banks 
and other institutional funders, has led to a profound acceleration of 
positive impact. While taken individually these are small scale changes, 
added together they have made a big difference to the communities 
and local environments that have benefited.
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Crowdfunding platforms that sprung up around 2011 to 2013, in the 
wake of the GFC, such as Ethex and Abundance Investment, offer the 
chance to crowdfund, either through debt (or loans) to organisations 
or through taking equity shares in smaller scale projects.
These investments often take the form of Community Interest 
Companies (CICs), which are designed to benefit communities rather 
than shareholders. With these, investors may be offered a ‘target return’ 
after a long period of time or bonds which offer a fixed rate of interest 
over a fixed term. Ethex is known for offering shares in community 
energy co-operatives and other socially beneficial organisations. It has 
raised more than £100 million since it was founded in 2013. Energise 
Africa, a collaboration between Ethex and Lendahand, offers fixed 
term bonds for solar projects in Africa.
Triodos Bank, a purely positive impact bank, also has a crowdfunding 
platform that helps to raise money from investors for Community 
Interest Companies and projects raising cash through bonds. A recent 
innovation from Abundance is the Community Municipal Investment 
(CMI) which allows local councils to raise money for specific projects of 
community benefit, from the local and wider community. It launched 
the first of these with West Berkshire Council in July 2020.
In the ten years since this new form of investment emerged, the 
Innovative Finance ISA – allowing people to invest in debt-based 
crowdfunds tax-free – has been launched. Many crowdfunds are also 
‘EIS’ or Enterprise Investment Scheme eligible, which means that 
investors can receive tax relief. The UK crowdfunding industry is now 
worth an estimated £550 million.
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ESG in pensions, ISAs and 
crowdfunds
“Investors are often portrayed as nameless, faceless capitalists. 
But investors are not ‘them’; they are ‘us’. They include 
parents saving for their children’s education, pension schemes 
investing for their retirees and insurance companies funding 
future claims. And investors need to finance companies in 
the first place, which they’ll only do if there is a prospect of 
financial return.”
Alex Edmans, Grow The Pie
The primary vehicles for ESG investing for people looking for a home 
for their money are through their pensions and stocks and shares 
ISAs. When discussing the inner workings of the investment industry, 
it can be easy to forget that what is at stake is the life savings – and 
consequently the ability to achieve financial security, retire well and 
leave a legacy to family – of millions of individual investors. A large 
proportion of these investors, who simply have a percentage of their 
salary automatically siphoned off into a workplace pension every 
month, may be totally unaware how their money is invested – or that 
their money is even invested. They most likely do not even think of 
themselves as investors, a term that suggests some degree of agency 
and control.
In the UK, the value of assets held in pension funds is £6.1trn – more 
than the value of property wealth. There are around 3 million stocks 
and shares ISAs, with an average holding of £23,380.3
There has been an awakening of interest in pensions as investments 
and their ability to help reduce carbon emissions – partly as a result 
of a rise in climate change activism focused on the finance and 
investment industry. Individuals’ own wishes for what their life savings 
pots are invested in have not historically been taken into account by 
pension providers, beyond offering a ‘low, medium or higher’ risk/
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return portfolio, because in the past people did not have much 
choice – a pension was something done ‘to’ you rather than by you. 
However as a result of a structural shift in the type of pensions most 
people now receive through their workplace to defined contribution 
schemes, together with more people now having access to a workplace 
pension, this has changed. Many large pension scheme providers offer 
sustainable options alongside the main ‘default’ schemes they offer 
to workers through their employers. Some are making the default 
scheme sustainable, meaning individuals themselves need do nothing 
to put their pension to work for the environment.
Beyond workplace pensions, those with investments in the stock 
market or looking at alternative investments, through crowdfunding 
in Innovative Finance ISAs for example, also have options.
There are sustainable options on investment platforms that offer a 
choice of funds, trusts and ETFs. You can also buy shares in companies 
that score highly for sustainability on some of the larger platforms.
In terms of identifying options that are genuinely sustainable, there 
remains, in the absence of standardised definitions, taxonomy and 
labelling, little substitute for doing your own research, or if you can 
afford it, employing the services of an independent financial adviser 
or wealth manager who specialises in sustainability. The level of work 
that individuals are required to do for themselves here is likely to 
change as green labels are introduced. However, even when they are, 
the most discerning sustainable investors may still not find a label 
sufficiently reassuring.
Where to inves t sus ta inably
Large investment platforms have the biggest range of options.
Interactive Investor has a range called the ACE 40 (www.ii.co.uk/ii-
ace) and also offers shareholder voting by default for customers who 
own shares directly in listed companies.
Other investment platforms where people can invest in positive impact, 
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sustainable and responsible fund options (although the number and 
quality of choices may vary) include:
• AJ Bell 
• Barclays Smart Investor
• Charles Stanley
• Fidelity
• Halifax Share Dealing
• Hargreaves Lansdown 
• Vanguard 
There are also a number of ‘robo’ investment platforms and apps that 
offer sustainable options:
• Moneyfarm
• Nutmeg 
• Wealthify
Some specialist ethical and sustainable investment platforms have 
curated investments for customers to save them the effort of sifting 
through hundreds of options on the DIY platforms. Among these are:
• EQ Investors
• The Big Exchange
Specialist sustainable investment apps:
• CIRCA5000
• Clim8 Invest
Specialist sustainable pension platforms and apps:
• Cushon
• PensionBee
Specialist ethical and sustainable independent financial advice firms:
• Bluesphere Wealth 
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• Castlefield 
• Cleona Lira 
• Ethical Investors 
• EQ Investors 
• In2planning
• Pennine Wealth
• The Path
• Tribe Impact Capital
A non- indus t r y perspect ive 
f rom Tony Burdon, CEO of Make My 
Money Mat ter
Tony Burdon is CEO of Make My 
Money Matter, the campaign co-founded 
by renowned film director Richard Curtis 
to drive awareness of the impact individual personal 
finances can have on climate change.
i t ’s o f ten sugges ted by people wi th in 
the indus t r y tha t re ta i l inves tor v iews 
and ac t ions are not as impor tan t as 
what regula tors , pol icymakers and asse t 
managers are doing to push away f rom 
foss i l fue l s and towards renewable energy. 
What do you th ink?
The industry needs to catch up with where people are and their 
values. The UK public are worried about the climate emergency and