We’ve seen a few articles recently touting 2022 as the year sustainable investment comes of age.
It certainly feels like something that should be commonly accepted at this point – investors have been demanding change in various ways since the mid-20th century, creating space for ethical alternatives to the traditional fund offerings.
Corporate governance expert Betsy Atkins calls our current climate the era of the conscientious consumer, “where more than ever before, a wide range of stakeholders care deeply about ESG.” We’re now seeing a cultural shift where companies have realised that strong ESG practices are not just appealing, but necessary for future proofing their relationships with their stakeholders.
(ESG refers to the pillars commonly identified for sustainable investments –environmental, social and governance factors. These create a holistic way to look at whether investments are ‘green’ or not.)
If 2022 is to be the year of sustainable investment, it must also be the year of transparency.
In October 2021, 60 organisations released an open letter for the European Union to act on standards for ESG disclosure. That wouldn’t happen in a world where we can trust ESG standards to be globally consistent and comparable, so we must start by accepting that, currently, they are not. There is a real risk of greenwashing, where companies can overstate their sustainability contributions and understate their environmental or social impact, because a global standard for this reporting does not exist yet.
Of course transparency does not equal action. It just means it’s much more difficult for products to be sold as something they are not.
Your average consumer is more likely to pay more for (and expect more from) products or services that make environmentally and socially conscious claims. With that comes an increased risk for companies who don’t walk the walk – should they be found to be greenwashing their contributions, it can deeply fracture any trust earned.
We don’t have to look far for examples of companies greenwashing their products. Just last year Volkswagen was fined a record A$125 million for deliberately deceiving both regulators and customers about the environmental performance of their cars.
More locally, in December 2021 Consumer NZ identified four brands not able to back up specific aspects of their sustainability claims – among them brands typically championing sustainable practices, like Maggie Marilyn and Ruby.
As consumers we’re likely more sensitive to retailer claims being overstated than we used to be. We want to get what we pay for, and we want to get it as guilt free as possible. The advice Consumer NZ gives on this is applicable to any investments as well.
From the article:
“The best way to protect yourself against ‘green’ marketing hype is to look for precise claims and evidence backing them up.”
So how can you look for this evidence as an investor?
If you’re not sure where to start on due diligence, look for areas where it’s been done for you. Take KiwiSaver for example – as of December 2021, all of the default funds now meet criteria excluding fossil fuel production or controversial weapons. The Government has already chosen the KiwiSaver schemes it thinks are suitable for this, and which it thinks will get you the best bang for your buck. So, if your only investments are through KiwiSaver, you might consider switching to one of those updated default providers, or checking that your current fund aligns with your personal values.
For those with other portfolios, information about where your money is going should be readily available to you. Transparency in all areas should be part of due process. Your adviser should be engaging in conversations about your expectations and requirements so you understand any potential trade-offs or caveats your investment decisions may have.
Another great thing to look for is third party validation. For example, firms with CEFEX accreditation voluntarily undergo annual audits by independent analysts to promote a culture of continuous improvement. It’s the nearest thing we have to a global stamp of approval for trustworthy investment professionals, so while it’s not a guarantee of ESG, it’s a good indicator a firm is dedicated to best practice when it comes to looking after your values and needs.
If you’re going it alone through retail apps like Sharesies and Hatch … first, a reminder that you can’t predict the market no matter how closely you follow it, so be wary of jumping into these kinds of investment platforms as a get-rich-quick scheme. In terms of research, you would need to perform that due diligence yourself and make sure your DIY portfolio aligns with your values. This might involve some deep diving into funds and/or companies.
Often we can do more than we think simply by looking at our current situation. It’s like choosing to recycle, rather than throwing your plastics in the trash – small actions can make a wider impact and be better in the long run.
And hey, even if 2022 isn’t the year sustainable investment finally comes of age… it’s certainly getting closer.
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