Achieving impact through ESG integration in the investment cycle

“There is an urgent need for agreement on strong and harmonised ESG process in order to achieve a long-term impact” says Oriane Schoonbroodt, co-founder and executive Director at Label R."

The road to ESG integration

A great deal of momentum is building behind sustainability, ESG integration and impact investment - the sustainability revolution has definitively taken off. But there is still plenty of confusion due to the lack of common definitions. An impact scaling strategy certainly incorporates, as a first step, environmental, social and corporate governance criteria into investment analysis and portfolio construction. Asset managers and owners bring ESG issues into the investment process in a variety of ways. Some actively seek to include companies that have stronger ESG policies and practices in their portfolios, or to exclude or avoid companies with poor ESG track records. Others may incorporate ESG factors to benchmark corporations to peers or identify best-in-class investment opportunities based on ESG issues. Still other responsible investors integrate ESG factors into the investment process as part of a wider evaluation of risk and return. We agree that whatever the process, there is an urgent need for agreement on a strong and harmonised process in order to achieve a long-term impact. Take the example of Elon Musk and Tesla, whose objective is to accelerate the world's transition to sustainable energy with electric cars. A lot of research and a strong factory organisation is needed to be able to scale and measure its impact, and lately Musk has been concentrating on internal processes to enable him to achieve his goals.


Stronger harmonised framework

With the adoption of environmental, social and governance criteria by private equity on the rise, a critical priority is to eliminate false impact claims and greenwashing by means of increased clarity, transparency and a stronger and harmonised framework. A Preqin survey of more than 300 fund managers worldwide reported earlier this year that 53% of respondents had established an ESG policy or have one pending, but in reality, we consider that less than 5% of PE funds can truly claim to be ESG-compliant. Some funds claim ESG compliance simply by putting a woman on the board. This chronic short-termist approach is hindering a transition to a sustainable economy in the medium to long-term, especially given that it has been proven that ethical investment delivers a greater return on investment. 

“Strict and impartial controls and checks will enable funds to move past false claims to scale their ESG impact”. 

Scaling the impact 

Standards are a logical step in increasing ESG integration. A stronger and harmonised standard with strict and impartial controls and checks will enable funds to move past false claims to scale their ESG impact. A notable example is the Guide Michelin, first published in 1900 as a guide to help French motorists find lodging on the road but now devoted exclusively to fine dining. Over the decades, the guide has drastically evolved from its humble origins to become an almost sacred tome for the chefs, foodies, culinary experts and restaurants that regard it as the final word in judgement of gastronomic excellence. The credibility of this more than a century-old guide stems from its consistent criteria and rigorous training of the inspectors of different nationalities who assess restaurants around the world. That model, which eschews random luck for careful judgement, is one that advocates of ESG impact in the financial industry should emulate.

Oriane Schoonbroodt
Co-Founder & Executive Director of Label R.
EMPEA Sustainable Investing in Emerging Markets Summit 
London Sheraton Grand Lane Park