The problem is not that Elon Musk has not read the ESG analyzes well enough…

Tharald Nustad on ESGs

In this article, originally published in Norway’s largest financial media outlet, Dagens Næringsliv, Katapult Founder and Impact Investor, Tharald Nustad, explores the shortfalls around ESG and calls for a greater clarification as to what ESG means in terms of positive impact.

The problem is that most people think that ESG investments generally have a positive effect on the world. This is also what many financial players sell with their ESG funds and products. But it is by no means certain that ESG investments will pull the world in the right direction.

In his post in Dagens Næringsliv on 25 May, Joachim Nahem from Position Green Group writes that Elon Musk must read ESG analyzes better.

It is a long way from achieving the lowest criterion of ESG, to actually having a positive impact on the world. Joachim Nahem is right when he says that Elon Musk is wrong in believing that ESG investments automatically have a positive impact.

The most recognized definition of ESG investments – and by extension the synonym “sustainable investments” – are investments that assess environmental, social and governance conditions. This is a very broad definition, which can be divided into three aspects at the company level:

  • investments made where ESG is assessed and often used to minimize financial risk in relation to these factors
  • Investments in companies that seek to reduce the negative effects of the company and contribute positively to their stakeholders, within ESG
  • Investments in companies that seek to contribute to a positive effect on the world with the solutions they deliver

None of these levels automatically ensures a positive impact on the world through investment. In order to have a concrete effect, one should rather look at the field “Impact Investing”, which we at Katapult work with and all our investments are located within.

In order for investments to have a positive effect, it is essential within “Impact Investing” that the investment makes a contribution beyond what would have happened if you had not invested. We call this ‘additionality’. Investing in listed companies rarely has such a positive effect because your money makes little difference. If the share price goes up or down, it does not change the company’s business model. This applies even to companies that have a large net positive impact.

In Impact Investing, it is an important point that your investment should make the world a better place, not just reduce the damages of a company that is already a problem.

We call the three levels within this type of investment the ABC of Impact – (A) avoid harm – avoid harm, (B) benefit stakeholders – positive contribution to stakeholders and (C) contribute to solutions – contribute to solutions.

There is therefore a significant gulf between  the lowest level of ESG investments, where you invest in companies that only report in relation to the regulations, to a position where you actually influence the world positively with your investments.

The general perception that ESG investments automatically have a positive effect is further problematised by the fact that six oil companies are on the ESG list, while Tesla falls out.

The challenge is that the term ESG investments is used for a wide range of investments, but is interpreted differently by everyone. For example, an Impact investment, which gives a measurable positive effect, is also an ESG investment. The challenge occurs when this definition also applies to investments where you only look at, and report in relation to the ESG, often with the aim of reducing financial risk and not actively doing anything to positively improve the world.

On the one hand, it is good that the EU taxonomy is working to integrate more of the higher levels of positive change, ie Impact, into its criteria. On the other hand, it is problematic that this further increases the confusion about what ESG investments actually are.

We at Katapult are absolutely convinced that you will get the best return from investing in the companies that have a clear ambition to contribute positively and solve major problems for the world. But when financiers now sell various ESG funds with zero or marginal positive impact, as investments that make the world better, then it unfortunately does not help to get the world moving in the right direction. It increases confusion around the concepts, and postpones the actual solutions.

It is high time that we clarify definitions and language use, and stop overselling.

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