Is ESG investing a case of “Fifty Shades of Green?” As we race to judge a company, are we impacting the World balance? It is a big question?

John Hall

Asset ManagementAsset ManagementESGRegulationsustainable

Investors continue to increase their allocations to ESG – however, due to a lack of criteria and an industry-wide framework to measure ESG, it remains unclear what sustainable investing stands for. Different interpretations of ESG are widespread across the asset management world which increases the risk of greenwashing.

Headlines

  • Lack of common framework to assess and measure ESG leads to confusion and greenwashing
  • Active management plays an important role in engaging with companies on ESG matters
  • Striking the right balance between different components of ESG and how to assess their importance is important
  • Investors are increasing their allocations to fixed income as issuance is on the rise

 

Key themes

The roundtable discussion opened with a brief outline of what leading experts consider ESG to be and the shift from investing in equities to fixed income.  Delegates agreed that ESG in fixed income is not just about green bonds, but also e.g. social housing issuance. There was a consensus that ESG has been present in fixed income for some time but perhaps has not been labelled as such.   

 

The discussion moved swiftly on to the specific letters in ESG and how to ensure equal attention is paid to them. Delegates agreed that regulation is broad enough to allow investment managers to make their own balanced decisions. E.g. one may invest in fossil fuels in emerging markets but then the proceeds will go to helping local communities. Delegates pointed out that divesting isn’t always the answer as when you divest you can’t influence.

 

Furthermore, participants discussed the importance of active management to help companies address their ESG issues and to ensure these are managed in line with agreed criteria. There was a consensus that you can engage with companies better through active management and that investing in an index prevents investors from making well informed judgements. A couple of participants noted that passive companies are increasingly implementing more active approaches providing LGIM as an example. The debate also covered the importance of investing in low ESG scorers to help them improve and to make a bigger impact.

 

The conversation subsequently shifted to a discussion on how the lack of a common framework, classification and consistency on ESG leads to confusion amongst investors and leads to greenwashing. A couple of participants noted that not many are aware of the European Commission Action Plan on sustainable investment. The action plan adopted by the European Commission in March 2018 has 3 main objectives

 

  • reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth
  • manage financial risks stemming from climate change, environmental degradation and social issues
  • foster transparency and long-termism in financial and economic activity

 

Finally, the conversation shifted briefly to the issue of how ESG is currently predominantly associated with institutional investors. Delegates agreed they see the demand coming from this group of investors.

 

Conclusions

  • A common framework is required for the industry to understand what ESG stands for, how to measure and implement it.
  • There is a consensus that fixed income is playing an increasingly important role in ESG.
  • Participants agreed that active management plays an important role in ESG and impact investing as it is possible to engage with companies on ESG-related issues more effectively.

 


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