While American investors are making record investments into sustainable assets, the sheer size of the volume suggest that some of the incentives are leading asset managers to ‘greenwash’ or exaggerate their ESG credentials. John Dyer reports.
American investors poured a whopping $12 trillion into sustainable investments in 2016, a 38 per cent increase from the prior year, according to the US Forum for Sustainable and Responsible Investment Foundation.
“Money managers and institutions are utilizing ESG criteria and shareholder engagement to address a plethora of issues including climate change, diversity, human rights, weapons and political spending,” said Foundation Chief Executive Lisa Woll in a press release.
That’s around a quarter of the total amount of assets managed in the United States.
But the sheer size of the stampede should also give pause to investors drawn to attract green enterprises seeking their money, said experts.
The incentives for companies and funds to “greenwash,” or exaggerate their environmental, social and governance, or ESG, bona fides to attract more funding is growing as fast the popularity of ESG investing.
“There are now stronger incentives for asset managers to greenwash,” Harvard Business School Professor George Serafeim told Quartz. “ESG cannot be just a marketing tool to attract capital. Right now there is a false sense of security or satisfaction if an investor buys an ESG product that might not be what the investor thinks it is.”
Quartz noted that few if any independent measures exist to definitively determine whether many industries are truly pursuing ESG practices.
While asset managers should perform that due diligence, investors will need more tools in the future as more and more money pours into sustainable investing, especially as more environmentally conscious younger generations start seeking returns on their wealth, the news website argued.
Lack of knowledge about ESG
A UBS survey of more than 5,000 wealthy clients found that few knew anything about the three categories of ESG investing: exclusion, or avoiding investments that conflict with ESG principles, integration, or using ESG principles along with traditional asset management, and impact investing, or steering funds to specific ESG goals that comport with one’s personal vision for the world.
The European Union has proposed such measures that would set new criteria for ESG investing and compel asset managers to disclose how they consider environmental risks in their portfolios’ strategies. Those measures would be designed to curb greenwashing that might deceive unwary investors, said officials.
“We want to establish an EU-wide classification system for sustainable activities, to provide common definitions for what is green and what is not,” European Commission Vice President Valid Dombrovskis told Reuters in May. “This is a groundbreaking step.”
Identifying new ESG opportunities
But others noted that asset managers are increasingly bringing their skills to bear on identifying new ESG opportunities, from waste management to smaller-scale enterprises and funds that might deliver good returns while addressing important issues at a grass-roots level.
A recent Bright Harbor Advisors report, for example, found that more than 80 per cent of institutional investors now have ESG mandates in their investment policy plans. Those big portfolios should be performing due diligence to the best of their ability.
“These shifts are significant signs that institutional investors are taking the structural steps necessary to reorient themselves to make sustainable a more routine part of their investment outlook and processes,” wrote Rob Day, an ESG investor at Spring Lane Capital, in Forbes.
ESG practices differ around the world
It might be impossible to ever measure every aspect of ESG investing, however, because many people would diverge on what makes for the best in social and governance practices, for example. American, European and Chinese investors and asset managers, for example, could have dramatically different ideas of what makes for the best outcomes to support.
In 2015, for example, State Street launched SHE, an exchange trade fund that promoted gender diversity. A year later, the investment bank installed the “Fearless Girl” statue across from the “Charging Bull” statue on Wall Street. The statue was a public relations success.
But later critics pointed out that the SHE fund only invested in American companies based on how many woman sat on their boards and worked as senior-level executives, hardly a driver of freedom for the most oppressed women in the developing world.