Investment motivations are being ignored in ESG

According to this opinion piece by Florian Heeb and Julian Kölbel, we should stop arguing over how a sustainable investment should look and start thinking about how financial performance, value-alignment or impact can be realized. Here’s an excerpt:

Not being clear about why we want to invest sustainably leads inevitably to confusion. For example, sustainable investment funds often contain oil stocks, based on the rationale that these companies perform best on ESG criteria within their industry. Many would argue this is greenwashing because burning oil is causing climate change. So, how can a fund be called ‘sustainable’ if it contains unsustainable companies? Likewise, a fund that excludes fossil fuel stocks may offer good conscience to climate-aware investors but do nothing to stop the burning of fossil fuels. How can a fund be called ‘sustainable’, if it does not contribute to making the economy more sustainable?

Both concerns have merit. But they presume different objectives behind an investment. Without distinguishing between these objectives, it is unfair to make greenwashing accusations. It is like complaining that a sports car does not have sufficient cargo volume or that a truck does not look elegant. Also, when assessing a client’s sustainable investing preferences, it is not enough to ask whether clients want to invest sustainably. It is essential to understand why they want to invest sustainably.