Environmental, social and governance (ESG) is a “poorly understood concept” and is at risk of being “lost in translation”, it has been suggested.

Speaking at the Pensions Europe conference, The Future of Work and Pensions, last week, 7 July 2018, USS co-head of responsible investment Daniel Summerfield said that some ESG cases have been “siloed” from the investment management process and need to be pieced back together again.

Summerfield argued that the conversation should be focused on highlighting financially material risks, and how it will affect specific companies, rather than branded with an “ESG label”.

He said: “The problem we have always faced with [ESG] development over the last 20 years is we are starting where we are today, because ESG is a poorly understood concept.

“These are financial risks … if you talk about ESG to an investment manager, the person at the coalface making investment decisions … if you talk about ESG their eyes will glaze over.”

The comments were made in response to the announcement that the European Commission is developing a taxonomy, in order to determine whether scheme investment activity is environmentally sustainable.

He added that making investors aware of the financial risks without using the ESG label should “make those people sit up and think about those risks carefully”.

Summerfield concluded: “The problem that we have created for ourselves, and I put my hand up, is we have created a monster called ESG responsible investment which in some cases becomes siloed from the investment management process.

“Unless we put it back together again like humpty dumpty and make it very clear to investors what we are talking about, then I fear this is going to become lost in translation.”

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