The ESG debate is becoming too simplistic
The sustainability and ESG finance debate has been oversimplified to the point where people have inadvertently over promised and under delivered.
Everything Should Be Made as Simple as Possible, But Not Simpler - attributed to Albert Einstein
Summary: The sustainability and ESG finance debate has been oversimplified to the point where many have inadvertently over promised (and under delivered). Investors have somehow been given the impression that by investing in positive ESG companies they can have it all - good financial returns, alignment with their values, and at the same time saving the world. All at no cost. That has also given ammunition to those who want to slow the process. Knowing the ‘what’ and ‘why’ of the requirement for investment helps one avoid green washing and green wishing (hoping that an easy and cheap solution makes the problem go away). Put simply, it allows us to better allocate our capital to projects that make a real difference.
Why this is important: If the language we are using is inadvertently confusing our shareholders/lenders and our clients, that is a dangerous place to be in an industry that relies on trust.
The big theme: The finance sector needs to support the sustainability transitions. We need to understand the real world complexity. Otherwise we end up investing our capital in projects that make little or no difference, other than to make us feel good - what economists would call a mis-allocation of capital on a grand scale.
The details
I spent most of my engineering career trying to make the complex real world (in my case earthquake engineering) simpler, more understandable. And I took this trait into my financial life, trying to reduce complicated investment cases down to the few really important things that we needed to understand. My best investing ideas were the ones where I could explain in simple terms what the market was misunderstanding (ie mispricing), and why there was a good chance that the future was going to turn out differently.
Given this, I never thought I would find myself saying we need to make things more complicated. After all, it's been drummed into all of us over the years that simple is best, that it helps people understand what it is you are trying to get across. Hence the frequent requirement that the pitch has to “fit on one page”, the “three bullet point” rule, and the “can you explain the investment case in under 1 minute” axiom in finance.
