At abrdn, we integrate ESG into the investment process because we genuinely believe that consideration of such factors can be material to investment outcomes – not because we are trying to "save the world."

The elevated news-flow around environmental, social, and governance (ESG) in the US continues to occupy mainstream news channels, and fuel often-heated debates, around what does and does not constitute being a good fiduciary. Much of the anti-ESG movement, however, may reveal a lack of understanding around terminologies, including ESG and sustainable investing. Including the incorrect grouping together of a wide and contrasting range of sustainable investing approaches. One key recurring theme that has been evident during this prolonged debate has been the need for more clarity and transparency from both investment managers and advisors/consultants when it comes to communicating and defining ESG capabilities and approaches.

We highlight the importance of sticking to a facts-based and transparent approach when it comes to sustainable investing and the need for investment managers and advisors to make clear the distinction between use of ESG in mainstream investing vs. use of ESG as an investment outcome approach. Such clarity and redefinition would ultimately make the debate around ESG investing redundant and furthermore, allow investment managers to get back to focusing on what they are best at: investing to enable clients to create more sustainable returns.

1. ESG and fiduciary duty can (and do) go hand in hand

Investment managers ultimately invest with one key aim in mind: to make the best returns possible on their clients' invested money. It would not make sense, therefore, to include factors into the investment decision-making process that would negatively impact those returns. Just as it does not make sense to exclude the consideration of relevant and material ESG factors within the investment process, which would go against fiduciary duty.

2. ESG factors, where material – are pecuniary

Much of the push back against ESG has focused on the argument that ESG is non-pecuniary. The US Department of Labor defines a pecuniary factor as any factor that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with a plan's investment objectives and funding policy.1 There is a growing body of evidence that points to ESG factors materially impacting the financial performance of companies. Material ESG factors therefore are pecuniary in nature.

3. There is no P in ESG*

Many investment managers do use ESG as part of an overarching agenda – but that agenda is not political – it is to ensure sustainable returns for clients by analyzing and assessing all material risks and opportunities faced by a company. For example, climate-related risks, and opportunities, are going to impact all companies, and ultimately all pension plans, regardless of whether they are headquartered in blue or red US states.

*The political environment is however considered material when conducting sovereign ESG analysis. abrdn's proprietary sovereign ESG framework assesses the ESG performance of over 80 emerging market issuers across a number of factors across four pillars – environment, social, governance and political.

AA-280623-164947-1