John Ploeg, Co-head of ESG Research at PGIM Fixed Income
Investors need to determine what they want to achieve with ESG, as a first step toward avoiding greenwashing and implementing ESG with integrity.
Some ESG funds manage ESG risk and are marketed as sustainable investments. However, because ESG risk and sustainability are not always synonymous, investors need strategies that take a clear and comprehensive approach to risk management.
Covid vaccines are a good example. When governments were prepared to pay hefty prices for vaccines, some companies charged excessive markups for them. Those companies might have been appealing from a credit and risk standpoint, but it was the companies selling vaccines at a cost that were much more attractive from an impact perspective.
The goal for investors should not be to avoid all risk, but rather to manage the risks being taken and ensure they are adequately compensated for them. Many ESG funds manage risk by excluding entire sectors. While that approach might address impact considerations, it may be less-than-ideal for successful risk management.
It may be a warning sign if a fund is managing risk primarily through exclusion, which suggests a formulaic box-ticking exercise, rather than thoughtful analysis.
For more on implementing ESG with integrity, watch our exclusive Three Minutes With interview with John Ploeg.
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