Published on November 1, 2022
In this video, Venk Reddy, CIO of Sustainable Credit, explains that ESG is not a strategy, but rather it is a framework for evaluating risks that have historically been ignored by traditional fundamental credit investors.
ESG is not a strategy. ESG is not an approach. ESG stands for, as many people know, environmental, social, and governance, and each of those is a category of risk. And so, ESG really is a way of describing a set of risks that aren't naturally captured with other risk categories, if you want to call them that. Right? Such as financial risk categories or business model or something of a sort. And so, from that standpoint, there's no such thing as investing in ESG there is such thing as considering ESG risk in an investment portfolio, and different approaches to using ESG risks and considering ESG risks will result in a different way of analyzing those risks. A true private impact equity portfolio or investment is going to lean toward evaluating ESG risks as the single most important factor that drives an investment decision regardless of any other risks. Right? On the other hand, if you have an index that claims to have an ESG overlay or filter, then that's going to have a very different consideration with respect to ESG risk. In our case, we consider ESG risks to be alongside or equivalent to other risks that would ultimately impact a company's credit worthiness. Because at the end of the day, they do impact a company's credit worthiness. The risks that a company is taking or not taking in order to be able to operate their business and eventually repay their debt is something that we've been considering our entire careers, including with respect to ESG risk factors. The truth is, most fundamental investors consider ESG risks in their portfolio; they just don't call it that. The difference, when you actually bring to bear a portfolio that takes a more comprehensive look at ESG risks as a set of risk factors in alongside other risks is that by considering a much larger breadth of factors, you're more likely to consider those ESG risks that are material to the company but that may have been overlooked by more traditional approaches that don't take a comprehensive look at this set of risks.
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ESG refers to Environmental, Social, and Governance.
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