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ESG investing requires a different decision process

The Financial Times reported recently that more European sustainable funds have started putting money back into defence companies and oil companies. For defence companies, the reason reported was that they were vital in maintaining national security, as evident from the conflict in Ukraine. For oil companies, the fund managers said that many big oil companies were actively engaging in developing renewable energy sources. But these comments seemed to be quite generic. No fund manager was quoted.

The obvious headline question is: was the decision driven by stronger performance of shares in these companies, or really due to reasons on S (for defence companies) and E (for oil companies)? If the latter, why only make these decisions now?

Without knowing the specific reasons behind the decision by the fund managers, it is difficult to answer the above question. And what is reported to investors in client communications may not be the actual issues discussed by the fund management team behind closed doors. Some scepticism is warranted.

The ambiguity behind these investment decisions in ESG or sustainable funds can lead to accusations of greenwashing and investor disappointment. The latter can prove to be a hurdle for advisers in working with end investors on their ESG objectives – will a fund suddenly change its decision in company selection and deviate from the end investors’ views and principles?

Investment analysts, managers, advisers and wealth managers were all trained up to make decisions based on objective data. We were trained on decision making based on net present value and discounted cashflow analysis. We learnt how they can be used to value stocks, bonds and other asset classes. Credit ratings, which were represented by alphabets like student grades, provided an easy-to-understand framework for fixed income managers and advisers to look at risk of counterparties.

We can point out many drawbacks, but suitability scores help advisers filter many possible portfolio allocations to a handful for an end investor.

Can decisions in ESG investing all be based in quantitative measurements? There are some that can, especially on the environmental aspect. Financial and corporate reporting bodies like the Global Reporting Initiative (GRI), International Corporate Governance Network (ICGN), Taskforce in Climate-related Financial Disclosure (TCFD) all try to come up with metrics to be reported to help managers to make decisions.

But that does not cover all ESG related decisions. The question on inclusion of defence and oil companies may go beyond these metrics. Changing the calculation framework will allow one to change the overall ESG score of a company, justifying its inclusion or exclusion. Remember the complaint from Mr. Elon Musk?[1].

The ESG industry (allow me to use this term) wants to make everything as quantitative as possible. This helps investment professionals to make decisions based on the training we all had. But many of these decisions cannot be captured within this type of objective decision framework. Trade-offs often occur, between ESG objectives and the financial objectives of the end investor, and sometimes between or within the E, S and G factors themselves. And often a decision framework that involves ethics and responsibilities to end investors needs to be involved.

Tricio is developing a decision framework to help advisers on such decisions. Keep an eye on our website for further news. Or, you can register your interest in this by emailing us at, putting ESG in the subject.

James Chu CFA

Head of Investment Solutions

[1] These points are discussed in full in the Tricio webinar, Time to rethink ESG investing. Drop us a note at for the the full recording and slides, putting ESG WEBINAR in the subject.

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