Why ESG Investing Is Failing Ethical Investors

Written by: Borja Barragan | Founder & CEO of Altum Faithful Investing

Without doubt, ESG as a movement within the investment management industry, is failing ethical investors – particularly those whose ethics are forged by Christianity – the world’s largest religion.

The problem for committed Christian investors with ESG is twofold: on the one hand, stands the lack of consistency of application of ESG principles between investment firms and their funds. On the other hand, ESG falls short in addressing moral aspects at the heart of Christian life, such as the dignity of life or religious freedom – considered by a growing number of faith-based investors to be a fundamental weakness in the furtherance of socially responsible investment.

This has led many investors to focus on faithful investing as it suggests greater objectivity, transparency, and clarity - so offering an additional layer of scrutiny over most ESG focused investment opportunities. This should not come as a surprise to industry observers given that rating agencies, regulators, and asset management firms, have failed to come up with a consistent, agreed approach to the application of ESG criteria.

This lack of consistency has been highlighted by academics who have shown that the correlation between rating agencies is low (see MIT Sloan School of Management study 2019 - Aggregate Confusion: The Divergence of ESG ratings) while a report from investment company SCM highlighted that a contributory cause of such divergence is the fact that few companies have their sustainability reports externally audited. (see: SCM Greenwashing: Misclassification and mis-selling of ethical investments). Furthermore, researchers have shown that less than 5% of companies are basing their ESG objectives on scientific data so highlighting a lack of scientific backing to their reporting.

Those who seek an ethical approach to investing, are often concerned about issues such as arms production, human rights violations, and labour precariousness. However, because ESG investing as is currently constituted, is inconsistent, it cannot provide these investors with the assurances they need to ensure they are investing with integrity.

Faithful investing based on Catholic doctrine, is focused on investing in assets or companies whose activity and practices do not conflict with certain moral principles. These moral guidelines come from the Doctrine of the Church, against which each company is evaluated for either respecting them - or not respecting them – so making decision making more assured.

These moral principles and values do not change over time as they are deemed to be an expression of truth and are therefore permanent, consistent and not contradictory.  For the faithful investor, they relate to four areas: a respect for human life; promotion of the family; the promotion of human dignity; and care and respect for creation.

In the case of ESG, objective evaluation differs between the individuals who make decisions as to what does, and does not, meet their criteria which may differ from one to another individual - so their approach is inconsistent. From an investor’s point of view, the choice therefore comes down to consistent faithful investing or inconsistent ‘ESG’ investing.

For those who seek an authentic life by aligning their actions with their core values and beliefs, ESG investing alone is clearly not enough, for while ESG seeks to add certain objectives of justice, equal opportunity, or care for the environment to financial analysis, the faithful investor additionally seeks to promote the family, to create prosperous economic relationships and to recognise the integral development of the human being. The faithful investor, therefore, goes beyond traditional ESG criteria in order to fulfil their own personal values.

Investing in a manner consistent with faith is therefore broader and deeper than solidarity with certain social policies, such as achieving a net carbon target or the levels of diversity of a company board. The faithful investor therefore seeks a more coherent approach, so developing a Christian culture - one which leads one towards goodness and beauty …. and that is an objective on which ESG just is not delivering.

Related: How Your Portfolio Can Reflect Your Personal Views