Alan Brown – Trainee Investment Manager
Environmental, social and governance (ESG) themed funds have emerged to a point of real prominence following the Covid-19 pandemic, as a plethora of retail investors have looked to add many of the heavily marketed funds to their portfolios. Funds saturated with buzz words like: responsible, organic, renewable, sustainable, green this and green that, have appeared from just about every investment management company in the UK. Significant questions remain surrounding the actual environmental impact of such funds as was recently admitted by Tariq Fancy, former head of Blackrock’s sustainable finance arm.
Responsible investing is nothing new and there are a number of long-standing funds with respectable performance track records within the field. This focus on the impact that investments have on the wider world is also not necessarily unique to ESG funds, with a large proportion of fund managers incorporating ESG considerations into their investment methodologies. However, the majority of the reporting of the environmental impact of investments is not standardized and is often not independently verified; leading to the risks of so called ‘green washing’.
The term ‘green washing’ was first devised by the American environmentalist Jay Westerveld, in his 1986 essay reviewing the practices of the hotel industry. His research into the hotel sector lead him to discover the industry was falsely promoting the re-use of towels as an environmental strategy, when in fact this approach was adopted as a cost saving exercise. Within the context of investment, ‘green washing’ is the practice of a company whereby misleading environmental claims are made for marketing purposes. The intention is to improve the reputation of the company, in order to attract environmentally and socially aware consumers and investors, and, ultimately to boost profits. Often there will be no material positive environmental impact.
This issue was highlighted recently by the allegations that the German asset management firm, DWS Group, exaggerated claims over sustainability focused investment. This followed on the back of claims from the company’s former global head of sustainability that the firm had made misleading statements in its 2020 annual report; stating that more than half of its $900bn assets under management were invested using ESG criteria. As news of the allegations emerged, DWS’s share price suffered a greater than 13% fall in the share price reflecting significant question about the company’s operations.
This is of course, not endemic of the market at large, as many organisations have capitalised on the growing demand for ESG products by improving their environmental and social performances. It does however pose a risk to investors, one which ESG fund managers argue their expertise in the field can mitigate, to an extent. Therein lies the challenge; to accurately assess a company’s actions and impact on the environment and society as a whole. Being able to do this will allow investors to make informed decisions when investing in both companies and funds. An essential component to progress on this front will be the standardisation of a form of ESG reporting for companies and the funds holding these companies. Such a standard, if independently reviewed, would allow for like-for-like comparisons, the means to assess improvements/deteriorations and a greater level of transparency within the market. There is no doubt that the establishment of an arbiter of industry standards, perhaps in a similar vein to the bond rating agencies, is a significant challenge with a multitude of barriers to overcome. Projects such as the United Nation Principles of Responsible Investment, for one, have shown that many organisations are willing to publicly demonstrate their commitments to investing responsibly. With over 3,800 signatories representing over $121 trillion dollars of assets under management, this is definitely a step in the right direction.