If you’ve ever been fooled by a ‘cotton-rich’ fabric claim before (and been disgruntled by the scratchy poly-cotton blend you received when the garment actually arrived) you’ll understand the importance of looking past buzz words when it comes to getting what you paid for.
Nomenclature is important, and in most cases, you legally cannot call something what it is not. You can’t call prosecco ‘champagne’, even if they’re both bubbly in the end. Similarly, leather and vegan leather must be distinguished from each other.
When it comes to sustainable options in the financial services industry, however, the importance of clear and distinct identification is still somewhat lost.
Environmental, sustainable and governance factors (ESG) are not universally coded, nor are they monitored by some global authority. If you’re someone who doesn’t want their investment dollars going into firms that contribute to pollution, or mistreat their workforce, or manufacture controversial items like weapons, you have likely heard of sustainable investment. It’s not a cure-all for the impact humans have had on the planet, but it is an attempt to do better while still delivering comparable fiscal results.
Of course, as with any new trend that might give companies a point of difference, there’s been a fair amount of bandwagon-jumping by those who want to get their slice of the pie. Legislation has been slow moving, though recent moves from the Financial Markets Authority – Te Mana Tātai Hokohoko indicate New Zealand is heading towards a crackdown on cowboys with a habit of putting the cart before the horse.
In July, the FMA released its review of disclosure information from a sample of management investment funds labelled or marketed as being ethical, environmental or sustainable (or a combination thereof). All of the funds had weaknesses in information disclosure in at least one area, with most needing improvement in “multiple areas”.
Considering that ESG-coded investments are relative newcomers to the modern investment zeitgeist, it’s not particularly encouraging to see the FMA reporting that overall it would be difficult for investors to parse through and find the relevant information to choose which funds they would like to select or avoid. Some of this was due to information being scattered across different sources, or lacking sufficient detail, or just not giving a complete picture.
If investors cannot see what they are actually getting, and why, it’s a red flag. Not only because you’re not getting what you want – but because it throws into question the integrity of an organisation who cannot or will not provide this information.
To be clear, you will likely not find an exact drill down of every asset in your portfolio, itemised by name and cents spent. But you should be able to definitively see what areas you are, and are not, engaging with – and this should be available upon request.
Greenwashing is used to describe misleading claims that lack concrete information about the actual ESG impact being achieved. It occurs when an organisation spends more time and money on marketing itself as environmentally friendly than on making measurable change.
We expect evidence of ESG credentials, but it is confusing for us as investors. ESG has a different meaning to us all. A professional investor will be looking for long term value and growth. Often this involves making change from within an organisation by collectively shifting the strategic direction of an organisation towards ESG. A retail investor wants to generate an immediate positive measurable social and environmental impact plus a financial return.
Those of us that follow capital markets understand that markets move fast to meet the needs of investors; it is clear regulation is playing catch-up. Similar to the steps taken by the FMA, the FCA in the UK is deciding on a new sustainability classification and labelling system for investments. The EU is focusing on disclosure and in the US there is a move to standardising ESG disclosures.
As investors all we want is a common system of accountability and measurability. We all have different needs. The professional investor will focus on multiple factors to determine the suitability of an investment. Many retail investors will focus on a single issue close to their heart. What is clear is that being upfront and transparent about ESG also builds trust rather than negatively impacting public reputation.
Think of the movement towards transparency in ESG investment in similar terms to the craze around organic produce. You might buy organic to avoid ingesting certain compounds, or because you believe they should not be used in farming at all – but if the people pulling your organic beetroot up are in poor conditions, or the company is secretly supporting dodgy activities, the small good you’ve done has been essentially wiped out by this misbehaviour.
Don’t be fooled by flashy claims. Look for the whole story. And if it’s not there… look elsewhere.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz