Do ESG stakeholders know as much as they should?

The Green Hori­zon Sum­mit ear­li­er this month is evi­dence that envi­ron­men­tal, social and gov­er­nance (ESG) Invest­ing is high on the agen­da of busi­ness and gov­ern­ment. More than 100 glob­al busi­ness and cli­mate lead­ers, includ­ing the Prince of Wales and Unit­ed Nations sec­re­tary-gen­er­al António Guter­res, took part.

Busi­ness lead­ers, asset man­agers and insti­tu­tion­al investors are already clued up on the ben­e­fits of ESG invest­ing. Yet for sus­tain­able invest­ing to become main­stream, it needs the sup­port of finan­cial advis­ers, cor­po­rates and retail investors.

Fig­ures from the Invest­ment Asso­ci­a­tion sug­gest the amount invest­ed in stocks and funds with ESG char­ac­ter­is­tics could be 50 per cent greater than in 2019, thanks in part to high-pro­file cam­paigns by Gre­ta Thun­berg and Sir David Atten­bor­ough.

“There has been a mas­sive increase in inter­est in sus­tain­able invest­ing in recent years,” says Mar­tin Shaw, chief exec­u­tive of the Asso­ci­a­tion of Finan­cial Mutu­als. “Con­sumer research indi­cates peo­ple are look­ing to sup­port more eth­i­cal and envi­ron­men­tal­ly-friend­ly com­pa­nies.”

How­ev­er, judg­ing the appro­pri­ate­ness and per­for­mance of dif­fer­ent funds is dif­fi­cult unless you have an inti­mate knowl­edge of how the mon­ey is invest­ed, he says. Even then, there is cur­rent­ly no uni­ver­sal method for clas­si­fy­ing the green con­tent of invest­ments.

Defining ESG investing

One of the issues, says Angela Hayes, part­ner at law firm TLT, is the lack of a com­mon approach among firms in describ­ing sus­tain­abil­i­ty objec­tives. There are no com­mon stan­dards for mea­sur­ing whether sus­tain­abil­i­ty objec­tives are being met.

“With­out this clear reg­u­la­to­ry frame­work, retail advis­ers will be nat­u­ral­ly more cau­tious about advis­ing their clients to buy green invest­ment prod­ucts,” she says. More stan­dard lan­guage and met­rics would also help retail investors to learn, under­stand and make deci­sions about the prod­ucts avail­able.

Indeed, one of the stick­ing points for the wide-scale adop­tion of sus­tain­able invest­ing is hav­ing a mean­ing­ful def­i­n­i­tion, says Jeff Waller, senior direc­tor and head of financ­ing solu­tions at sus­tain­abil­i­ty con­sul­tan­cy ENGIE Impact.

“Invest­ments that are labelled ‘sus­tain­able’ fall along a wide spec­trum. An invest­ment can be deemed sus­tain­able if it sim­ply screens out com­pa­nies that don’t meet a min­i­mum thresh­old of ESG fac­tors, like those in the tobac­co and weapons sec­tors,” he says.

One solu­tion might be to cre­ate mar­ket-accept­ed guide­lines, such as those for green, social and sus­tain­abil­i­ty bonds.

“If the rest of the indus­try adopt­ed sim­i­lar frame­works across the sus­tain­able invest­ing land­scape, it could bring a lev­el of trans­paren­cy that could help the mar­ket grow,” says Waller.

The role of independent financial advisers

A poll of 200 UK inde­pen­dent finan­cial advis­ers (IFAs) by the inter­na­tion­al busi­ness of Fed­er­at­ed Her­mes found that 82 per cent report­ed an uptick in inquiries from investors about how their cap­i­tal can be com­mit­ted to com­bat the effects of cli­mate change, raise gov­er­nance stan­dards and improve human rights.

Pete Drewienkiewicz, chief invest­ment offi­cer of glob­al assets at Red­ing­ton, argues the pres­sure towards sus­tain­able invest­ing is now com­ing from investors.

“It is impor­tant for invest­ment advis­ers to hold the asset man­agers to account to help get every­one on the same page, because I don’t think the asset own­ers are going to tol­er­ate inac­tion much longer,” he says.

New Euro­pean Union reg­u­la­tions on sus­tain­abil­i­ty will apply from March 2021 and will require finan­cial advis­ers to pro­vide infor­ma­tion to enable investors to make informed invest­ment deci­sions based on ESG fac­tors.

“To real­ly dri­ve change, we need to see fund man­agers chang­ing the way they allo­cate port­fo­lios to meet the grow­ing impact demands of their clients and to pre­vent tokenis­tic invest­ing with an ESG or impact label,” says Daniela Barone Soares, chief exec­u­tive of Snow­ball, an impact investor.

ESG data and investor scrutiny

Asset man­agers and IFAs have the poten­tial to be change-mak­ers because they are able to dri­ve change with the weight and influ­ence of the cap­i­tal they man­age on behalf of their clients, says Richard Ker, part­ner in the finan­cial ser­vices prac­tice at Odgers Berndt­son.

“Com­pa­nies with poor ESG cre­den­tials should expect to see greater scruti­ny from asset man­agers and asset own­ers more broad­ly,” he says. “Cap­i­tal will nat­u­ral­ly flow to com­pa­nies with strong ESG cre­den­tials, which in turn dri­ves bet­ter per­for­mance.”

Jef­frey Mushens, tech­ni­cal pol­i­cy direc­tor of The Invest­ing and Sav­ings Alliance says IFAs will need to cater for these chang­ing investor pref­er­ences and field more queries about the ESG rat­ing of exist­ing invest­ments.

This is par­tic­u­lar­ly true when deal­ing with mil­len­ni­al investors, who take a much more eth­i­cal stance on invest­ment.

“IFAs need to be one step ahead of the curve to ensure they can advise on these wish­es of the younger demo­graph­ic who care about sus­tain­abil­i­ty,” he says.

Patrick Shee­han, a founder and part­ner at ETF Part­ners, says the invest­ment indus­try is respond­ing to the more exten­sive changes hap­pen­ing in soci­ety and needs to be aware of the new invest­ing cre­den­tials of younger gen­er­a­tions.

“The real issue is that we face soci­etal change and younger gen­er­a­tions are mov­ing the nee­dle for­ward,” he says. “The younger gen­er­a­tions are dri­ven by pur­pose and we see a gen­er­a­tional shift towards pur­pose, per­haps because of the big­ger crises the world is fac­ing, and in par­al­lel we are see­ing and expe­ri­enc­ing invest­ment demand.”

Who makes the biggest impact to sustainable investing?

William Bur­rows, man­ag­ing direc­tor at AHR Pri­vate Wealth, says the shift towards sus­tain­able invest­ing has large­ly been dri­ven from the bot­tom up. Grass­roots cli­mate change move­ments, the #MeToo cam­paign and investors have all led the charge and applied pres­sure to busi­ness­es to change their image and place sus­tain­abil­i­ty at the heart of what they do.

These move­ments have also influ­enced gov­ern­ments to encour­age sus­tain­able invest­ing. The eco­nom­ic uncer­tain­ty caused by the coro­n­avirus pan­dem­ic has made advis­ers and clients reassess their per­cep­tions of val­ue and adjust port­fo­lio allo­ca­tions accord­ing­ly. 

“Many investors have used the cri­sis as an oppor­tu­ni­ty to adapt their port­fo­lio to new or chang­ing views about the impor­tance of sus­tain­abil­i­ty as cli­mate change becomes ever-present on the news agen­da,” he says. This and the rel­a­tive strong per­for­mance of many ESG funds dur­ing the pan­dem­ic has led a grow­ing num­ber of con­sumers to embrace sus­tain­able invest­ment prac­tices.

When it comes to sus­tain­able invest­ing, advis­ers need to solve prob­lems togeth­er with clients

Invest­ment advis­ers will need to rethink their role in the future and change the way they work with clients, says Dr Emilio Mar­ti, assis­tant pro­fes­sor at the Rot­ter­dam School of Man­age­ment, Eras­mus Uni­ver­si­ty.

“Dis­cussing sus­tain­able invest­ing with clients often push­es tra­di­tion­al invest­ment advis­ers out­side their com­fort zone,” he says. “When it comes to sus­tain­able invest­ing, invest­ment advis­ers need to solve prob­lems togeth­er with clients.”

The education gap is already shrinking

Ilar­ia Cal­abre­si, sus­tain­able invest­ment lead at J.P. Mor­gan Pri­vate Bank, says it is the need to stay com­pet­i­tive that will dri­ve com­pa­nies towards sus­tain­abil­i­ty in the future.

COVID-19 has accel­er­at­ed change, and Celene Lee, prin­ci­pal and senior invest­ment con­sul­tant at Buck, argues that any edu­ca­tion gap which pre­vi­ous­ly exist­ed between insti­tu­tion­al investors and large cor­po­rates, has already shrunk dra­mat­i­cal­ly.

“With ever-increas­ing access to sus­tain­able invest­ing infor­ma­tion, such as car­bon emis­sions data, con­sumers and investors have been able to begin build­ing a pic­ture of who is doing well and who is not, on the sus­tain­abil­i­ty scale. It’s this knowl­edge that is begin­ning to shift the bal­ance in terms of cap­i­tal flows towards more sus­tain­able busi­ness­es,” she says.

Josh Gre­go­ry, founder and chief exec­u­tive of Sugi, con­cludes: “What’s need­ed is a dif­fer­ent way of pre­sent­ing sus­tain­able infor­ma­tion to retail investors as well as finan­cial advis­ers and cor­po­rates in a way that’s direct­ly rel­e­vant to them and their needs.”

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