If you’ve turned on the business channels or flipped through the financial papers recently, you’ve probably seen a lot of less-than-glowing coverage of ESG – Environmental, Social, and Governance – factors that investors are increasingly considering when building their investment portfolios.
The headlines, simply put, are questioning whether ESG investing delivers good returns — or even makes a difference in building a better world. In a year in which most portfolios have taken a hit — and one of environmental and geopolitical turmoil — it’s a seemingly easy case to make. The true story, however, is much more complicated.
The challenge of defining ESG investing
ESG investing, a concept that has been around for over 50 years, has many different definitions or approaches — which is a key challenge in trying to compare apples to apples. As a recent Bloomberg article put it: “Each ESG rating provider uses its own proprietary system, algorithms, metrics, definitions, and sources of nonfinancial information, most of which aren’t transparent and rely heavily on self-reporting by the companies they rate.”
And into this void, the practices of greenwashing, as well as impact washing, where investments are spun as environmentally and socially positive without mentioning the serious downsides — has mushroomed. A startling example is China’s Three Gorges Dam, which has issued over $840 million in “green” bonds for wind-power projects, despite flooding 13 cities and 140 towns, and relocating 1.2 million people. Similar uncertainty surrounds how some companies measure Social and Governance metrics.
According to Shannon Ward, Genus’ Chief Revenue Officer, ESG investing has, in many ways, become a victim of its own success. “For much of the past 30 years, we had to work hard to get people to listen and understand and care about this stuff,” says Ward, of the fact that Genus first started in the ESG space back in 1992, when few others were engaged. “A few years ago, a switch flipped — and now we have a bandwagon,” she adds. “People are listening, but there are so many voices now that it’s hard to know who’s greenwashing and who’s real.”
How to get clarity on your ESG investments
Ward says the only real way to separate the wheat from the chafe is to talk to an investment professional and ask them how they create their funds. “How do they choose the companies they’re investing in? How do they measure?” she asks. “Because there’s all sorts of different measurements right now, so you have to figure out whether your asset manager is measuring in a way that’s transparent— where you feel like you have enough insight into whether your capital is having the effect you want in the world.”
As a signatory to the United Nations Principles for Responsible Investing, Genus takes ESG issues into account across all of its investments, but each fund uses different metrics.
For those interested in taking their sustainability commitment to the next level, Genus also offers fossil-free funds that specifically exclude companies in fossil fuel intensive sectors — as well as impact funds focused on companies actively making positive change in the world. “The impact funds are not just about eliminating negative factors,” says Ward. “They’re also about really promoting positive factors. It’s an additional layer of impact.”
ESG is about our collective future
ESG ratings and ESG-filtered funds won’t save the world, but they do offer a way to measure how seriously a company is taking social and environmental issues – and their potential impact on shareholders. “This is about progress,” says Ward. “It’s not about perfection. That’s why we offer a wide range of products — because we feel like there’s a spectrum of impact here. And where a person falls on that impact investing spectrum depends on many factors, including risk tolerance and investment timeline. This is about people’s future.”
As for what the future of ESG looks like, it’s likely that, after a tumultuous few years, greater transparency and standardization will be the outcome. Earlier this year, Canada’s accounting and auditing bodies made the decision to establish a standards board for sustainability measures — a response to investor concerns about ESG confusion and greenwashing.
And there’s little doubt that sustainable investing, in whatever form, is a long-term winner: according to research from George Serafeim of Harvard Business School, sustainable companies carry a 300-basis-point equity-valuation premium over non-sustainable companies.
The key thing for ESG investors to remember is to look past current market turmoil and focus on the big picture of sustainable investing. “We’ve seen these ups and downs before,” says Ward. “We’re telling investors the same thing we would tell them in any market environment: There needs to be a long-term outlook. Yes, this is a little bit of a perfect storm — but two years ago, everything was fantastic for ESG. The role of an asset manager or portfolio manager is to help you keep that vision on the long road ahead.”
Interested in exploring what ESG investing could look like for you? Contact a Genus advisor to get started.
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