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Forward thinking | Article - 3 Min

The bigger ESG picture

Views on sustainability-related investing differ around the world. Some investors only care about unconstrained investment returns; others have a greater sense of social responsibility alongside a belief that an ESG slant helps avoid investment risks and acts as an enabler of future returns. We ascribe to the second view, but problems can arise from a misunderstanding of what ESG integration [1] is good at doing. Edward Lees explains.

Some ESG approaches are built to be scalable and hence tend to be largely systematic. This satisfies the human desire to press a button and quickly have a set of standards that can be applied across a wide range of investment products. However, it can also create challenges.

Starting to see the bigger picture

The growing scope of ESG data gives us detailed information on a range of topics across E (environmental), S (social), and G (governance) issues.

Using a proprietary system such as the one we employ at BNP Paribas Asset Management allows us to go beyond broad scores and analyse the individual metrics to identify red flags (or under-appreciated ‘green flags’ [2]) specific to the companies being assessed.

This can help significantly with Do No Significant Harm tests, which are part of any sustainability evaluation. Good assessment systems also include feedback from fundamental analysts (who look beyond ESG data and develop their own views of company ESG risks). 

How do you score apples versus pears?

Things tend to become more complex when developing company and portfolio scores. This is because the categories being assessed are typically quite different from each other.

In addition, the companies being compared frequently do not provide the same information. The sectors and countries in which they operate can also be quite different. For example, looking at a US technology fund from an ESG perspective is generally more straightforward than for a multi-sector or global fund. 

Disclosure also matters for ESG systems. Smaller companies may be at a disadvantage as they may not have many ESG-related policies or resources. This can result in lower ESG scores regardless of the company’s merits.

Nonetheless, data points will be aggregated from all the different companies. Given the wide range of variables and the considerations mentioned above, it is therefore no surprise that different ESG systems can score the same company quite differently.

Talk, or meaningful action?

In my view, many ESG integration approaches focus on how companies do things rather than on what they do, so some methodologies can overlook companies that actually offer solutions to environmental and social issues. To me, this seems at odds with the spirit of ESG investing.

Take carbon-focused data as an example. A furniture and a solar company might hypothetically show the same Scope 1, 2, and 3 carbon emissions[3] footprint, but which is better when it comes to decarbonising society is obvious. This would be captured by Scope 4 [4] – avoided emissions – but this data is typically not available (our Environmental Strategy team aims to assess it where possible).

As another example, a low-carbon gaming software company could appear better than a large, higher-carbon utility that is pivoting its portfolio away from fossil fuel energy production towards green power. In the Environmental Strategy Group’s view, the difference in scores would not reflect reality – the gaming company’s activities are unrelated to the world’s climate change problems, while the utility company’s efforts are addressing them.

Pragmatism, not dogma

The approach of the Environmental Strategies Group is to use ESG analysis to better identify company-specific issues, but not to pay excessive attention to company or portfolio scores.

Instead, we aim to focus on the products and services that companies are selling and whether they will make a return. We consider their past carbon profile, but focus more on future net zero targets and their contribution to decarbonising society.

As environmental thematic investors, this leads the Environmental Strategies Group to the enablers of change and those companies that will be the greatest beneficiaries of the USD 275 trillion of aggregate spending [5] required by 2050 to support a net zero transition. We think of this as going beyond ESG and invest in enabling companies that make a real difference to climate change.

For more on thematic environmental strategies, go to Environmental thematic strategies – BNPP AM Luxembourg professional investor ( or your local country website


1. Using environmental, social and governance criteria to select (in this case) stocks for investment

2. Any data point which might indicate that a company is likely to outperform from a sustainability perspective

3. The World Resources Institute and the World Business Council for Sustainable Development divide carbon emissions into three categories: Scope 1 – direct emissions from sources and assets controlled by a firm; Scope 2 – indirect emissions from purchased electricity; Scope 3 – indirect emissions from across a firm’s value chains

4. Scope 4 includes the emissions avoided when a product is used as a low-carbon substitute for other goods or services, fulfilling the same functions but with a low carbon intensity; also see

5. Source: McKinsey Global Institute – The net-zero transition: What it would cost, what it could bring


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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