While sustainable investment assets at the last count totalled around $30 trillion, as of April 2019, there is widespread scepticism about the extent to which the asset management industry has truly embraced environment, social, governance (ESG).
So concerned have some stakeholders become that many are openly advocating for industry or regulatory-led standardisation. Virtuous as this may be, finding an acceptable compromise on standards is not a trivial exercise, and needs to be well-thought through if ESG investing is to become industry-wide best practice. Given the urgency of climate change, agreement needs to be found quickly.
Data is unreservedly the biggest inhibitor constraining ESG investing. Despite the relatively straightforwardness to compute the environmental impact of a given investment, it is much harder to calculate its social impact, mainly because the measurables (in contrast to the variables for environmental impact) are opinions-based.
The situation is not helped either by the sheer number of voluntary ESG codes and methodologies, a lot of which have been crafted by competing interests including industry groups, regulatory bodies, institutional investors, global asset managers, banks and rating agencies, to name but a few.
Amid this confusion, “greenwashing” and “impact washing” has been allowed to thrive. In one report, Morningstar conceded that some asset managers had simply renamed their products as being “impact funds” without actually changing the nature of their underlying investments.
To combat this, the industry needs to come up with a single, non-prescriptive unifying standard. The European Commission is currently creating a taxonomy and it is possible that this standard could one day be adopted by other markets beyond the EU.
Standardising basic ESG principles – given the wealth of opinions on the subject – will be a massive challenge for the industry though. Such standards would need to be sufficiently watertight to prevent greenwashing, but compatible enough not to impede investment altogether.
This balancing act, for instance, should encourage investment into ESG assets but simultaneously cannot restrain managers from holding shares in pollutant companies, especially if they are exercising their shareholder rights to promote constructive reforms. In summary, any industry-wide ESG standards needs to be high level and non-prescriptive.
However, this is not a carte blanche for complacency. Irrespective of the development of such standards, investors – owing to their different priorities – are still likely to demand fund managers provide them with increased and highly customised ESG reporting.
Moreover, asset managers with exposures to pollutant companies must demonstrate that they are exercising their shareholder rights and pushing for change at these businesses as mandated under the Shareholder Rights Directive II (SRD II). And finally, it is possible that managers suspected of greenwashing could one day be penalised for product mis-selling under MiFID II.