What innovation have you seen in responsible investing?

I feel we are going through a transition. ESG 1.0 was about exclusions, i.e. cutting some sectors out from portfolios for clients that wanted to invest according to certain beliefs. Then around the mid-2010s, asset managers started to launch strategies that were less about exclusions and more about finding innovative companies able to contribute to a sustainable future - that was ESG 2.0.

In my view, a weakness of this approach is the use of sustainability scores from MSCI or Sustainalytics, because these scores are backward looking and narrowly focused. Tech companies, banks or healthcare firms score very highly as they have much less environmental impact than industrials or oil companies.

Investors have piled into these high-scoring ESG names in recent years. They’ve been richly rewarded by markets but have ended up with very growth oriented, tech-heavy sustainable portfolios.

Now, I think we are entering into the next phase – in part because of the market downturn. ESG 3.0 is really about going back to basics and conducting deep research on companies. Investors need to look beyond the leaders to find investment opportunities in less covered areas such as transitioning companies.

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