What is greenwashing? What does it look like? And what to look for to assess a fund's commitment to sustainability?
Greenwashing
As a firm actively engaged in the asset management industry, we find it important to remain aware of the key trends & topics that are shaping the future of the industry (and the economy as a whole). In that vein, this is the second publication in a series of posts exploring trends in responsible, sustainable, and impact investing.
As a response to increasingly widespread environmental concern, many of the world’s largest companies have made significant steps to address their role in the degradation of the planet.
For example:
1: Volkswagen’s Clean Diesel line of cars
2: Reynold’s American Tobacco’s line of Eco-Friendly cigarettes
3: Nestle’s plastic initiative
Jokes aside, the so-called “greenwashing” efforts that have cropped up in virtually every industry is not just a problem for eco-conscious consumers, but it also raises an important question for the increasingly large share of investors who look to invest sustainably as well. With an increasing number of funds being labelled and marketed (especially to retail markets) as ‘sustainable’ or ‘responsible’, how can investors be sure they aren’t buying into a greenwashed fund?
In the past, adopting an exclusionary approach — i.e. one that excludes unfavourable industries like tobacco, alcohol, gambling, controversial weaponry etc… — was sufficient to earn the label of ‘responsible’. In today’s world, excluding certain industries is simply not enough to be considered sustainable.
So what are some of the things investors should look for when evaluating a fund’s commitment to sustainability? We recommend investors to look past all the fancy labels and leaf-related imagery, and consider the following:
1. Contextualised Integration of ESG Scores + Fundamental Analysis
True integration of ESG research into the investment process. This requires an approach that does more than just take a raw ESG score to rank and filter the investment universe, but rather one that digs deep into how the potential ESG-related risks are likely to affect fundamental/financial performance. The approach should account for a company’s industry, maturity, business model, supplier relationships, geographical location…etc. In essence, it is important that the ESG scores are part of an integrated approach that provides
meaningful context and helps delineate real risks.
2. Appropriate Exclusionary Approach
If the fund excludes certain types of companies, you should make sure these exclusions align with your view on sustainability. Furthermore, it is worth considering whether it is better to avoid problematic companies vs. engaging with them to initiate change.
3. Meaningful Engagement Practices
In that vein, many asset managers tout their commitment to “active ownership” as part of their engagement policy. Unfortunately, many funds primarily side with the recommendations made by the management team when it comes to voting. Moreover, the ‘company engagement’ many asset managers talk about often boils down to 1 or 2 cursory e-mails/letters sent throughout the year. These actions can add up to an impressive number of total engagements across all companies invested in, but rarely translate into any meaningful change. That’s why it’s important to delve into a fund’s engagement policy in detail. Dedicated teams that measure and report on their engagements with companies (on topics of sustainability) consistently and over a long period of time, is something we see as a must.
4. Integration of ESG across all product lines
Finally, we believe ESG integration should not just be a selling point for a few of an asset manager’s sustainable funds. As a valid source of insight on a company’s likelihood of long-term success, asset managers should be taking steps to integrate ESG across their entire portfolio of funds.
In essence, the key is (as always) to dive into the details, and identify whether a given fund is doing more than just the bare minimum when it comes to ESG integration. In an investment world where sustainability is no longer a niche consideration — even Christine Lagarde is pushing for the ECB to enact measures to counter climate change, in part by evaluating companies on sustainability [1]— it is of utmost importance to look beyond the raw scores generated by the world’s sustainability ratings agencies (Sustainalytics, MSCI, S&P Global etc…), and think critically about when and how to use them effectively within an investment framework.
End of Responsible Investing — Part 02
Can responsible investing generate returns? What does the future of RI look like? How does responsible investing align with the needs of Gen Z/Millennial investors?
Find out in Core’s next edition on Responsible Investing.
[2]:
https://www.truthinadvertising.org/six-companies-accused-greenwashing/
DISCLAIMER
This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this Post constitutes a solicitation, recommendation, endorsement, or offer by CORE to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
