Limitations of ESG Integration

Limitations of ESG Integration

Alex Struc

20 years: Asset management

In the second video in this two-part series, Alex highlights some of the challenges businesses face when implementing ESG considerations into their decision-making processes.

In the second video in this two-part series, Alex highlights some of the challenges businesses face when implementing ESG considerations into their decision-making processes.

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Limitations of ESG Integration

8 mins 1 sec

Key learning objectives:

  • Identify the challenges businesses might face when implementing ESG considerations into their decisions

Overview:

ESG integration, or an evaluation of the investee's business's environmental, social, and governance aspects to assess potential risks and opportunities, is the practice whereby the financial analysis is complemented by evaluation of off-balance-sheet items, which affect companies’ operations and business model.

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Summary

What are some of the challenges businesses might face when implementing ESG considerations into their decisions?

  • Organisational structure can be cumbersome and inflexible

    Investors’ demand for ESG solutions is not a demand for a better version of the same product - it is a need for meaning - a specific request to combine their financial performance with creating impact at scale.  Established firms can be too fragmented and inflexible to accommodate this because their focus on execution of legacy products has been highly profitable.

  • Challenging consensus can be risky

    People’s innate risk aversion to incurring losses is the main reason why ESG integration may fall short of one’s expectations to make an impact.  Embracing consensus precludes most firms from going deeper than reactive product offerings to meaningfully alter investment processes and develop truly innovative solutions for clients.

  • High cost of operations

    An inconvenient truth of ESG integration is that it is expensive for managers to implement.  New data, process design and implementation, compliance, talent acquisition, training, and retention are additional items, which are expensive, but investment managers must facilitate.

  • Agency issues in financial markets

    Due to the complexity of financial markets, there is a considerable distance between capital allocation and the end client, that distance is filled with intermediaries.  Fusing ESG issues into the historically prioritised risk-return considerations can be difficult for investment managers, wealth managers, and financial advisors alike.  The ability to think in first principles is a luxury of start-ups – this facilitates innovation and provides a welcome environment for new wave of asset allocators.

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Alex Struc

Alex Struc

Alex is a fixed income investor with deep credit expertise. His work on liquid impact investing, deep expertise in financial markets, and a strong belief in the power of scalable frameworks to outperform and foster positive change drove him to found GOALSFIRST with a single vision of unlocking the full value of finance for change. Prior to founding GOALSFIRST, Alex managed credit assets for PIMCO for nearly fifteen years, including the firmwide exposure to financials and the world largest bank capital fund. In 2014 he was named FN’s 40 under 40 asset managers for his work in this sector. In his earlier years, he built the firm’s European bank loan business and positioned PIMCO as a liquidity provider in that space by introducing relative value trading to this seemingly illiquid asset class.

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