ESG (environmental, social and corporate governance) describes investments with the aim to contribute to the improvement of the environment, society or workplace. Such investments are becoming increasingly popular, with the share of global investors applying to ESG criteria, to at least a quarter of their total investment, having jumped from 48% in 2017 to 75% in 2019, according to Deloitte.
Because of ESG relatively new-found status, the ability investment managers, shareholders and individual investors to evaluate the meaningfulness of various ESG criteria are still evolving and uncertain. As such, even data providers like Morningstar are finding it challenging to fully understand what fund managers are doing in their respective ESG space, leaving the door wide open for “greenwashing”. This is the practice of making policies or statements to make an investment or investment fund seem more ESG friendly that it actually might be.
The problem of Greenwashing is made evident when analysing at the composition of some ESG funds. For example, the largest fund in the world by assets, the MSF Value Fund, had 2.45% of its total portfolio allocated to oil exploration companies as of July of this year. Moreover, despite South Korea being on the world’s hottest markets for debt raised in compliance with ESG standards for several years, data from the South Korean stock exchange has recently shown that only less than 3 per cent has been solely focused on environmental projects. Auditors have attributed this problem to a lack of a clear framework for verifying ESG issuance.
Such a lack of clarity around ESG presents a significant problem for those who wish to support more sustainable businesses. According to Catherine de Coninck-Lopez, head of ESG at Invesco, fund managers who are underreporting ESG practices and/or achievements signify a “huge concern in the investment industry”.
With huge pressure for asset managers to offer ESG strategies, regulators and legislators have started stepping up. The European Union has proposed a plan that from 2021 onwards establishes performance thresholds and minimum safeguards to help companies and investors transition to a greener economy. This entails that by the end of the year portfolio managers of European ESG funds will have to clarify how and to what extent they applied the safeguards when determining if companies are following sustainable steps.
However, Kristen Sullivan, partner and American region sustainability service leader at Deloitte states that while “we have largely seen the regulatory momentum taking place in Europe” there have been very few steps taken in the USA. As such, experts agree that more oversight is indeed needed. Corporate actors have taken significant steps in the right direction, with JP Morgan unveiling an index- the JP Morgan ESG (JESG) index- which integrates ESG factors in a composite benchmark that covers more than 170 countries and 650 issuers. Such tools are to reward the issuer for their ESG status, instead of their market capitalisation. However, despite such positive steps from corporate actors, a major un-tackled issue on the “to-do” list includes reminding governments that a significant portion of the responsibility for ESG standards rests with them, as “political or regulatory leadership of the governments is critical to promote systematic ESG reporting in those countries”; according to Hiro Mizuno, the Executive Managing Director and Chief Investment Officer of Japan’s $1.4 trillion Government Pension Investment Fund (GPIF).
References
Amaro, S., 2020. Unregulated ‘Greenwashing’? ESG Investing Is Under The Microscope As The Money Rolls In. [online] CNBC. Available at: <https://www.cnbc.com/2020/10/14/esg-investing-meaning-is-under-the-microscope-as-the-money-rolls-in.html> [Accessed 19 November 2020].
Hodgson, C., 2020. Funds Branded ‘ESG’ Are Laden With Technology Stocks. [online] Ft.com. Available at: <https://www.ft.com/content/ea295d51-d5c2-4916-8c63-017c352ea577> [Accessed 20 November 2020].
Jones, M., 2020. For ESG Investors, The Newest Challenge Is Separating Fact From ‘Greenwashing’. [online] MarketWatch. Available at: <https://www.marketwatch.com/story/for-esg-investors-the-newest-challenge-is-separating-fact-from-greenwashing-2019-10-15> [Accessed 20 November 2020].
Lobo, D., 2020. Investor Faith Risks Drowning In A Rising Tide Of Greenwash. [online] Wealth Manager. Available at: <https://citywire.co.uk/wealth-manager/news/investor-faith-risks-drowning-in-a-rising-tide-of-greenwash/a1363868> [Accessed 20 November 2020].
White, E. and Buseong, K., 2020. Asia’S Biggest Market For ESG Debt Hit By ‘Greenwashing’ Concerns. [online] Ft.com. Available at: <https://www.ft.com/content/15602932-5bb1-49de-90bf-15932bc1aac4> [Accessed 20 November 2020].