More and more people are seeking out ways to make sure they do not invest in environmentally unfriendly companies and invest in ones that are making our world a better place. Of course, hand-in-hand with this trend of people wanting to do good, is the wave of those who want to capitalise on it. Unfortunately, there is a dark side to ESG (environmental, social, governance) investing. The cynics amongst us can imagine how some investment companies might look at this ESG movement and think of how they might use it to increase their assets under management. They might launch a FTSE 100 ESG fund, but the only difference between that and a fund that invests in the FTSE 100 is that it has ESG in the title. That might be an extreme example, but the point is that ‘greenwashing’ is everywhere. And it is really difficult for investors to work out what is authentic and what is smoke and mirrors. So, what can investors look out for? Here are a few pointers for your check list.
Watch out for ‘highest ESG-rated companies in each sector’.
This is a key phrase to understand, as it is used a lot in greenwashing. Recently, the Wall Street Journal highlighted that eight out of 10 of the biggest so-called ‘sustainable’ funds in the US are invested in oil companies, which seems odd since most oil companies have a somewhat colourful environmental track record. The explanation from these off ending fund managers is that they have designed their sustainable funds to off er investors a similar level of risk and return to those they would expect from a broader market index. And to achieve this, they need exposure to a range of sectors including ones such as fossil fuels. Their ‘sustainability’ grading is on a spectrum so if there is an entire sector that is not particularly environmentally friendly – like oil and gas – the fund will invest in the companies that are not such bad environmental off enders, or ones that are better in terms of governance, or looking aft er their employees. And these funds cannot do it any other way – if they excluded the entire oil sector because it is bad for the environment, then they will not own the same stocks as the market and their fund might underperform when oil companies do well.
What are the fund’s voting policies?
If a fund is telling you it cares a lot about environmental risk, what has its track record been on this? What has its voting policies on environmental issues been? Take BlackRock. Very commendably, its CEO Larry Fink recently sent a letter out to the CEOs of its portfolio companies, saying the company plans to put climate change at the heart of its US$7trn portfolio, stating it will use its voting rights to influence sustainability amongst the thousands of listed companies it invests in. Other large asset managers like Vanguard and State Street have also put environmental issues high up on their impact agendas. However, it’s important to dig deeper and make sure that strong words are followed by strong action. Groups like Shareaction, a shareholder action group, report on the percentage of climate-related shareholder resolutions that funds have voted on, and whether they have voted for or against positive environmental policies. This does not tell the whole story though as some large asset managers will work directly with investee companies through their own internal stewardship teams to help effect change.
Challenge fund manager policies.
This is linked to the point above and is about the actual policies funds have – or should have – on engaging with their companies on ESG issues. So, if an asset manager is claiming theirs is an ESG fund and that they encourage their businesses to be progressive, then you are within your rights to challenge them on that and ask them how they do it. Such policies should be documented and if there is a lack of transparency, you need to be asking why that is.
And the fund’s own environmental record?
In a situation where it pays to practice what you preach, it is important that the fund itself has a good environmental track record. If fund managers and fund executives are flying around the world unnecessarily, or organising big corporate junkets for worldwide attendees, then this is not necessarily the best message when you are trying to effect good ESG behaviour within the companies you are investing. This is just the tip of the iceberg, of course. There are lots of other red flags, flashing lights and neon warning signs to help make sure your ESG investment is a credible one.
Patrick Thomas is an ESG investment expert at Canaccord Genuity Wealth Management.
Further reading: ESG themes for 2020 and how best to invest in them
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. This is not a recommendation to invest or disinvest in any of the companies or funds mentioned. Names of companies and funds are included for illustrative purposes only.
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