Environmental, social and governance (ESG) investing has been the big investment story of the past five years. And, if we judge solely by products launched, articles written and task forces created, we might conclude that all is going well and that ESG considerations are being seamlessly integrated into investment processes.

But in reality, many – perhaps most – organizations are struggling to come to grips with how to truly embed ESG considerations into the way they work.

ESG has gained mainstream traction because proponents emphasized the financial materiality of considerations such as climate-related impact, diversity & inclusion and human rights. But even though those considerations are financially material, their impacts are not primarily financial.

Financial considerations opened the door, but when ESG as a financial factor walked through that door, that wasn’t the only bit of it that walked through. The scope of ESG factors is broader than that of traditional financial factors; their impacts are bigger and wider, over a longer time horizon; and those impacts – big when looked at through a financial lens – are even bigger when looked at through a non-financial lens. These things matter in themselves even more than they matter as financial factors.

And most asset management organizations aren’t quite sure how to handle that.

A natural response is to try to stick to what financial firms know best: financial considerations. “Sure”, the thinking goes, “these are issues that go far beyond the financial, but we do not need to concern ourselves with that. It is our responsibility to focus on the money.” After all, ERISA defines fiduciary duty in terms of the financial best interest of beneficiaries, so sticking to that seems like a safe bet.

This is avoiding the question. Money is not the sole measure of all value: however hard we try, money cannot measure everything.

ESG factors, by their very nature, are things that money alone doesn’t measure particularly well or where the impact is passed on – externalized – to third parties. So ESG investing begins with financial impact, but it carries us beyond that. It raises difficult new questions for asset management firms.

An analysis of effects like climate impact, biodiversity, human rights cannot stop at the financial impacts because the line between what is financial and what is non-financial is so uncertain. Even if you choose to believe that the only part of that analysis that matters is the part that can be measured with money, it’s little more than guesswork where that part starts or ends.

So you cannot analyse the financial considerations in isolation; they are not neatly ring-fenced from their wider implications, but inseparable. To paraphrase the old saw: if you only understand the financial implications of ESG factors, then you don’t understand the financial implications of ESG factors. Only once this is recognized can a firm begin to develop an effective ESG investing program. For firms – and indeed for individuals – ESG does not begin to be meaningful until there’s been the “aha” moment where you realize that everything is connected.

Among the challenges presented by this wider view is the question of fiduciary obligation. When a fiduciary is acting on behalf of a third party, the motivation to act in a way which achieves personal financial gain at the expense of a larger financial or non-financial loss for others is no longer merely one of self interest, but rather may involve a legal obligation. The situation – of being legally bound to pursue gain at the expense of the broader good – has been described by the commentator Duncan Austin as one “which no non-sociopath would ever accept.”

Society functions better when individuals retain a notion of good citizenship, when corporations accept a degree of corporate social responsibility, and when investors likewise retain a sense of responsibility for the impacts of their decisions. That is one reason for the overwhelmingly negative response to the Department of Labor’s 2020 rule “Financial Factors in Selecting Plan Investments”, which in effect presupposed that any effort to achieve social or environmental goals was necessarily imprudent and hence discouraged good citizenship. That rule is under review and not currently being enforced. While the US context is ambiguous – and, unfortunately, politically charged – the global picture is clearer: increasingly supportive of ESG considerations, with regulators taking a variety of steps to align incentives appropriately and to encourage a long-term and responsible mindset throughout the investment community. These steps make it clear that, while the notion of a broader responsibility does not negate the fiduciary’s duties of prudence and loyalty, it can sit alongside them.

In this ambiguous and shifting context, formulating an appropriate response requires firms to take an honest look in the mirror. Firms need a clear policy on their approach not only to the financial aspects of ESG factors, but the non-financial too.

Three key principles apply here: purpose, materiality and an authentic connection to the firm’s investment process. Each asset management organization has its own investment process, its own areas of focus, its own approach to delivering value for clients. Likewise, each organization needs to work out for itself how ESG considerations are best embedded into that process.

Having a clear sense of purpose helps to align the whole organization behind the approach, defining a shared starting point for investment, operations, sales, client service and communications. The firm’s position should be known, accepted and applied across the organization. Without this foundation, well-intentioned initiatives – such as hiring analysts, building marketing platforms, investing in better data – can end up achieving nothing.

These questions do not have simple answers. But until firms address them, they’ll continue to struggle with what ESG investing really means.