ESG investing, also known as sustainable investing, may sound simple enough, but confusing jargon, the potential for greenwashing and the different ways investors can think about social responsibility are making it difficult for asset managers and regulators alike to allay concerns.
Nevertheless, assets into ESG investments have been exploding around the world as investors do their best to help deal with issues like climate change, pay equity and indigenous rights.
In Canada, the value of sustainable funds at the end of the first quarter of this year stood at $18 billion, an increase of 160 per cent from the same time last year, said Wendy Berman, vice chair of the Ontario Securities Commission.
But Berman told a recent roundtable hosted by the Canadian Securities Administrators (CSA) that “sustainable investments” have created a whole new set of growing pains and challenges, specifically the “race to green.” So far this race has created new ESG funds as well as incorporated ESG concerns into funds that already exist, causing the potential for greenwashing, which is when a fund’s disclosure or marketing either inadvertently or intentionally misleads investors about the ESG aspects of the fund.
Earlier this year, the International Organization of Securities Commissions issued a report recommending that securities regulators set regulatory and supervisory expectations for asset managers on ESG-related risks and opportunities.
The CSA has been looking into ESG funds and has identified a number of concerns.
“From my perspective the real problem is that investor demand is outstripping the industry’s knowledge and the regulator’s responses at this point,” he said. - Jean-Paul Bureaud
During the roundtable, Hugo Lacroix, Superintendent of Quebec financial markets regulator, the Autorité des marchés financiers (AMF), outlined his concerns. Lacroix said one of his biggest worries is that not only are new funds cropping up and attaching the ESG label, but others are changing their prospectuses to include ESG, while still others have tried to add ESG to their names without even putting ESG into their investment objectives.
A recent AMF review found that the regulator’s current rules would benefit from greater disclosure, particularly when it comes to investment strategies and proxy voting disclosure.
A week after the CSA roundtable, the Quebec Financial Centre for a Sustainable Finance released a statement saying that its members are committed to developing local expertise in sustainable finance and investment. It is also promoting the establishment and growth of business units in sustainable finance and encouraging greater disclosure and transparency in sustainable finance.
David Rutherford, vice president, ESG Services at NEI Investments, said he believes one of the biggest issues with sustainable investments is that current rules and regulations leave investors to figure out a lot on their own. “That’s a bit of an unfair burden, but if the alternative is rushing to a set of definitions that shortchanges and misrepresents what we do I am not sure that’s a better shake. We have to remember who this is for,” Rutherford told the roundtable.
Using ESG to drive change
While some investors buy sustainable funds to promote economic growth, others do it as part of a long-term value strategy. Rutherford said clients with NEI are not using ESG investing to drive wealth, but to drive change in issues such as climate change and pay equity.
In fact, it is “challenging” for investors to understand the reasoning behind particular investments, noted Melanie Adams, vice president and head, Corporate Governance & Responsible Investment at RBC Global Asset Management.
Adams said there are basically two groups of investors interested in ESG products: those who want to invest with a certain set of values – such as against SIN stocks – while the other group looks at them from a risk-return view, basically ESG funds that may have long-term benefits.
For their part, advisors need to be able to explain products and understand the differences in terminology so they can pass them on to clients.
Some investors go all in when it comes to ESG, delving into ESG scores and controversies of some companies and might even exclude issuers based on those reasons. “That’s not your values anymore; now you’re talking about the risk to the portfolio,” she said.
Greenwashing
Jean-Paul Bureaud, executive director of FAIR Canada, said his concerns about ESG investing deal with the risks to investors of being greenwashed. While he said the environment is ripe for potential greenwashing risks, he added he believes deliberate greenwashing attempts are low.
“From my perspective the real problem is that investor demand is outstripping the industry’s knowledge and the regulator’s responses at this point,” he said.
Mari Brossard, senior manager, Sustainable Investment at National Bank Investments, said she is more concerned about the lack of visibility in what the funds are doing than greenwashing.
“What investors need to know is how we are integrating responsible investment matter in an investment process. So for me, it’s increased disclosure that’s addressing the lack of visibility.”
More clarity needed
She said asset managers need to provide clarity in what they are doing, including the goals they are trying to achieve.
Some companies think that the current rules and regulations around disclosure apply to ESG funds. But Ian Howard, global commercial director, Sustainable Finance Solutions, Sustainalytics at Morningstar, said that kind of view just creates uncertainty on what disclosures are really required.
“That is creating a lot of apprehension. The lawyers on my side are very concerned about how issuers and funds use [our information] and I think that works against the objectives of regulators because it stops people from disclosing ESG research and analysis information and that’s created a bit of a problem in the market.”
Indigenous rights
While many people think of ESG and sustainability solely in the realms of reducing greenhouse gas emissions and promoting sustainable economic growth, RBC’s Adams noted that socially responsible investing also includes issues like pay equity and indigenous rights.
Rutherford noted that resource companies that don’t have a policy of dealing with indigenous rights are at risk.
“The other side of it is: why aren’t you, as a corporate citizen considering indigenous issues in your business operations? We would ask companies to think of indigenous issues in both perspectives.”