Sibos 2022: ‘The biggest problem with ESG is its complexity’ – Brown Brothers Harriman

Millennials and generation Z are expected to push for an ESG-exclusive market and it’s likely that only the green, clean, ethical, sustainable and socially responsible funds will be up for grabs in the future. A new era of questioning non-ESG investments will begin, asset managers will have to decide how to manage the $30 trillion of assets inherited from baby boomers and the securities market will be forced to endure the biggest change it has had in years.

For ESG issues to be resolved, Whelan believes that first and foremost, banks and asset managers must better communicate with their communities. He shared that coming from “a lower socio-economic background has been hugely beneficial because you become externally focused from a younger age.”

He added: “Sometimes it’s a burden, or it was when I was a younger person, and even as we talk about ESG, the S is diversity and inclusion in all its forms. While gender equality is obviously important, and of course racial equality, I do think socio-economic backgrounds need to be looked at in our industry a little more.”

Speaking about ESG more generally, Whelan stated that the “biggest problem is its complexity. Even the concept of ESG and the aggregation of those things, there are three separate things that have been lumped into one.”

Competing priorities and preferences have long been an issue for asset managers; considering the S, banks must look at the composition of the workforce, but not everything is as efficiently disclosed as it should be. Further to this, with climate change dominating headlines, many of the UN SDGs, in some ways, are neglected.

Whelan also highlighted that considering the G of ESG is some ways peculiar because governance is key to a bank’s operations. However, it is not only about having ‘good governance’ or a governance infrastructure that works, but it also covers cybersecurity and diversity, for example. “I think ESG is too broad a church,” Whelan said.

Despite this complexity, ESG is everywhere and across banks, asset management and in every part of capital markets. “Everybody has to be doing something, either by law, regulation or for commercial purposes. If you don’t have a coherent ESG strategy, that becomes your story,” Whelan warned. While the regulator will be the entity to catch a bank out if they are greenwashing, it is the institutional clients that need to prove their sincerity around ESG with data, not marketing.

Europe is driving the agenda when it comes to corporate disclosures, but as Whelan explained, there are a number of other regulatory rollouts but there is a lack of objective data analysis, where the hyper political, hyper emotional elements are removed from the current equation. This has led to a culture war where risk management or capital allocation to better long-term risk adjusted returns are based on belief systems.

“The other thing about ESG is that it isn’t, it can’t and won’t be the same on a regional or geographic basis. ESG can’t be the same in India as it is in the UK or the Nordics or the US because the economies are built differently. The political environments are also very different. Standardised approaches to ESG is just not the way the world works,” Whelan concluded.

The views expressed are as of October 12, 2022 and are a general guide to the views of Brown Brothers Harriman (“BBH”). The opinions expressed are a reflection of BBH’s best judgment at the time and any obligation to update or alter our views as a result of new information, future events, or otherwise is disclaimed.