Sustainable assets have surged worldwide to more than $30tn in the past couple of years, but the concept of sustainable investment remains ill-defined. Terminologies are often used interchangeably in this space, including socially responsible, or environmental, social and governance investing, as well as impact investing and negative screening, through to green or value based investing. An alphabet soup of acronyms, such as ESG, SRI, RI or PRI, contributes to generate confusion, while lack of standards gives asset managers leeway to overstate their commitment, a practice known as ‘greenwashing’.
“It is such a huge jungle out there of different approaches, everyone can deselect a few sectors, or use MSCI screening and label their product ‘ESG’,” states Lea Vaisalo, chief portfolio manager at Nordea Investments, Nordea Wealth Management’s product selection unit.
But how big is the risk that standards are watered down to the point that they become meaningless?
This was a topic discussed in UBS’s first ever ESG and Sustainability Symposium, held recently in London. Two approaches can be adopted in the sustainable investing space, explained Juan-Luis Perez, group head Research, Evidence Lab and Data Analytics, at UBS. The first is about imposing high standards, but it calls into question whether companies will be able to reach that threshold. The other is about reaching satisfactory standards. “Even if it is a very imperfect version of what sustainable investments should be, the spillover effect to society is going to be huge,” he said. Either way, asset managers must be held accountable for the products they offer to clients.
“Greenwashing is a real threat to our industry as a whole, but asset managers are not the only ones that have to solve the problem,” said Esther Gilmore, partner at Generation Investment Management. Legal frameworks are going to be a game changer. Also, it is key to educate people – be they trustees, asset owners or investors – about the importance of sustainability challenges, which are rapidly worsening.
Higher transparency on how ESG factors are integrated into the investment process, and greater accountability, will ensure a strong connection between the investment objective stated by the asset manager and what is delivered to the client, said Eugenia Unanyants-Jackson, global head of ESG research, at Allianz Global Investors
This is vital as investors increasingly require sustainability considerations to be applied across all their assets and at all stages of the investment process. Indeed, 60 per cent of high net worth investors expect that sustainable investments will represent the norm in 10 years, according to UBS research.
Regulation and standardisation of data provision will certainly favour the sustainable investing industry growth. Eventually, companies will be required to disclose robust and consistent non-financial data, such as diversity, carbon and water metrics, health and safety metrics. This will enable asset managers to compare them, just as food labels enable consumers to compare nutrition facts.
Investors seek to invest in a sustainable way to generate a positive impact on society or the environment, or at least to avoid doing harm. But increasingly they want to manage risk. More and more, they will ask asset managers whether their portfolios are “transition ready” for climate crisis, for instance, as this will increasingly affect their assets’ financial performance.
As the industry matures, there will be no space for deliberate greenwashing. As fund selectors sharpen their skills in the sustainability area, investors become more demanding, regulation increases and data standardisation improves, only those asset managers able to demonstrate they integrate ESG factors into each step of their investment process will survive and thrive. Asset management firms might as well start now, before their reputation is damaged.
Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter @elisa_trovato
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