In this first edition of An Investor Asks, I received the following question from a macro investor:
The Question
“ESG has, rightfully or wrongfully, become a politicised term. I also think it is used as an unfair shorthand for more complex analysis ecosystem within investment firms.
Can you go over how you see the taxonomy of this ecosystem generally (ESG, sustainability, responsible investing), how you think more firms/investors structure these areas in organisations and most important how you think it should be done?”
My Take
This is a great question because it speaks to two very real shortcomings in the sustainability space within investments:
1) We are all drowning in sustainable alphabet soup that alienates non-specialists.
and
2) Sustainability strategy and implementation too often happens in a vacuum disconnected from investment realities.
ESG; RI; SI; WTF?
When ‘ESG’ took off in recent years, the industry saw an explosion of acronyms and terminology relating to product design, portfolio commitments, and reporting metrics. Much of this work — data collection, analysis, disclosure, and interpretation — was delegated to specialist sustainability teams.
This drove a surge in demand for sustainability professionals, many of whom entered from outside traditional investment roles. At the same time, regulation and industry initiatives moved quickly, requiring new classifications and labels to be developed at speed.
However, two problems emerged. First, the rest of the investment organisation was largely excluded as responsibility was delegated to small specialist teams. Second, even among specialists, there was — and remains — disagreement over what many of these terms actually mean.
An Attempt at Explanation
Before attempting to define the key terms, a few caveats are necessary:
- Regulators across regions have adopted very different approaches to sustainability-related fund labelling. While convergence is emerging, the regulatory environment remains fluid.
- The language of ESG has evolved rapidly. What a term meant five years ago may no longer reflect current practice.
- Some firms have used sustainability labels opportunistically for commercial purposes. Combined with performance disappointments, this has contributed to skepticism.
With those caveats in mind, below is my attempt to describe how these terms are generally used in practice today, and where the main areas of debate remain.
| Term | How it is typically used in practice | Key areas of debate |
|---|---|---|
| ESG | Refers to the assessment of Environmental, Social, and Governance factors as part of investment risk management. Typically focused on monitoring, exclusions, and/or engagement related to company operations, products, and services. | Highly politicised, particularly in the US. Often misinterpreted as an ethical or values-based investment approach rather than a risk lens. Confusion persists due to its use in asset-raising and marketing. |
| Responsible Investing (RI) | Generally combines ESG risk management with baseline ethical exclusions (e.g. controversial weapons) and functional portfolio screening (e.g. avoiding high emitters to manage stranded asset risk). | Can describe a firm-wide philosophy or a fund-specific approach. Often associated with “doing good” but should not be confused with proactive inclusion of positive impact companies. |
| Sustainability | Can be a broad descriptor of how a company’s operations, products, and services affect environmental and social outcomes. Can apply to portfolio companies, asset managers and asset owners themselves. Can refer to integration of sustainable factors into pro-active investing (see sustainable investing below). | The term’s breadth makes it feel vague and imprecise. Often used interchangeably with ESG despite different implications for governance and portfolio construction. |
| Sustainable Investing (SI) | A proactive investment strategy that explicitly selects companies based on the positive environmental or social impact of their products and services. Frequently aligned with frameworks such as the UN Sustainable Development Goals. | Underperformance of some sustainable funds has reinforced backlash. Frequently confused with ESG risk management despite fundamentally different investment objectives. |
I wish this table were shorter and simpler. Unfortunately, the reality is that these terms remain contested. Many practitioners will disagree with aspects of the descriptions above — and that, in itself, illustrates the challenge.
It is therefore understandable that mainstream investors tune out when even specialists struggle to agree on definitions.
Why Skepticism is Understandable
Another reason investors disengage is that sustainability professionals have often erred on the side of advocacy rather than analysis as I’ve highlighted before.
Problems arise when sustainability functions drift from evidence-based support into normative judgement without explicit client mandate. This can come across as prioritising personal convictions over fiduciary responsibility.
As one investor put it to me recently: “They act like it’s their money, not client capital.”
This concern is valid. Sustainability professionals — like all investment professionals — must never lose sight of the primary purpose of asset management: to act as stewards of capital on behalf of clients.
How to build better sustainability practice within investment firms
The second part of the question is the more important one: how sustainability responsibilities are actually structured inside firms — and how they should be.
In my experience, most financial institutions centralised sustainability responsibilities into specialist teams. Over time, those teams accumulated an extraordinary range of mandates: investment-relevant research, ESG data analysis, regulatory interpretation, stewardship support, climate strategy, product labelling, and corporate commitments — often simultaneously.
Two factors make this especially acute. First, sustainability teams have faced cost-cutting while regulatory, reporting, and client commitments have persisted. Second, the breadth of responsibility rarely matches the skill profiles within those teams. Engagement specialists are asked to be data architects. Researchers are pulled into governance design. Strategists are buried in compliance mechanics.
(As an aside: I’m honestly surprised there are not more business-critical mistakes made in this space given these tensions – which speaks to the dedication of many of these professionals to make this situation work)
The result is burnout, talent risk, and — more worryingly — business risk.
So what would I change? The changes below are actionable and would go a long way to integrating sustainability into commercial strategy and investing operations.
The Business of Sustainability in an Investing Context
- Diffuse responsibility. Sustainability responsibilities should sit within the relevant business areas rather than being concentrated in a central team.This approach embeds sustainability into decision-making rather than treating it as an external overlay. Some examples:
- Portfolio climate and sustainability risk analysis belongs in risk teams, where deep modelling expertise already exists.
- Responsible and sustainable product design should be owned by product and business development teams.
- Sustainability research should sit within thematic or macro research functions, where analytical rigour and quantitative tools are the norm.
- Upskill the enablers. There remains a strong need for environmental and social issue experts within investment firms — but their role should be to enable, not to own, sustainability activity.
- These experts must be upskilled with a greater focus on commerciality, evidence-based analysis, and quantitative skills. Firms need credible practitioners who speak the language of investments, understand client objectives, and prioritise fiduciary outcomes over advocacy.
- Build Effective Collaboration. Sustainability — whether related to investing or corporate commitments — should neither sit in isolation within a single team nor be pursued independently by business units. Well-designed cross-functional groups can work effectively if they are:
- clearly governed,
- goal-oriented,
- and explicitly incentivised by senior management.
- Sponsor from the Top. Senior leadership must set clear direction on what the firm stands for and where its sustainability ambitions lie. These beliefs will — and should — vary by firm and client base.
- Where executive intent is unclear, practitioners struggle to gain traction or may pursue actions that are inconsistent with corporate strategy. Leadership sponsorship is essential to ensure alignment, accountability, and credibility.
This area is undoubtedly a work in progress and thinking will surely evolve further. If you’d like to follow this evolution, please subscribe using the button below.
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This material is provided for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities.