(Bloomberg) --

There’s been much debate about which letter matters most to investors in the abbreviation ESG.

Numerous surveys have been done on the topic, with many concluding that the “E” for environmental carries the most weight. Others suggest that trying to evaluate companies based on their combined environmental, social and governance credentials leads nowhere because the terms are incongruous and should be assessed separately.

Despite the various viewpoints, ESG has grown into an estimated $35 trillion business with a plethora of investment products (and a growing consensus that many if not most of them do little if anything but pay lip service to ESG). With so much money to be made, asset managers everywhere are devoting more resources to building out their “sustainable” investing teams as more funds gravitate to the industry. 

Analysts at Bloomberg Intelligence recently asked head and senior traders at 93 European asset management firms, including hedge funds, about what matters most to their business: The E, S or G. The overwhelming consensus was traders find governance to be the most important.

Unlike portfolio managers who are more focused on the environmental and social pillars, traders are most concerned about working with counterparties that maintain ethical standards, according to Larry Tabb, BI’s head of market structure research. The last thing traders want is to get caught up in a regulatory quagmire, he said.

The BI study focused on Europe because the region is seen as most advanced in adopting ESG principles. ESG investing has clearly “moved into the European mainstream from its role as a niche strategy,” said Jackson Gutenplan, a senior associate at BI who took the lead on compiling the survey.

Almost half of European asset managers surveyed expect to allocate a larger part of their budgets to ESG from a year earlier, he said. As regulations mount, none of the firms in BI’s study said they plan to spend less on ESG initiatives and compliance.

In order to avoid government scrutiny, many traders will shun business with firms that fail to meet specific codes of conduct, including data privacy, anti-corruption and ethical internal controls, or firms that fall under national sanctions, Gutenplan said.

The survey found that 87% of European buyside traders said governance is “important” or “very important” to their business, especially in vendor and counterparty relationships.

Smaller firms, or those managing less than 1 billion pounds ($1.2 billion), allotted more importance to all three of the ESG components than their larger peers, Gutenplan said.

Only 12% of large firms, those overseeing more than 15 billion pounds, ranked the environmental component of ESG as “very important,” compared with 39% for medium-sized firms and 47% for small firms.

In aggregate, social considerations rank as the least essential pillar among traders, Gutenplan said. It’s considered the broadest category of ESG, with diversity weighing in as the most prominent issue. But social also includes topics such as operational health and safety, community rights and relations, customer welfare and marketing.

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