ESG investing has undoubtedly found critical mass: according to data released by the Responsible Investment Association (RIA) last fall¹, responsible investments under management have reached $3 trillion in Canada, while the proportion of surveyed investment professionals who use ESG integration as a responsible investment strategy has risen to 94%.
At the same time, investors are increasingly concerned about greenwashing and impact washing²: the practice of overstating the benefits of a portfolio company’s ESG practices, or understating some of the potential downsides³. And as the RIA points out, the past few years have seen a series of “high-profile crackdowns on misleading ESG claims by the U.S. Securities and Exchange Commission and the U.K.’s financial regulator”. In its survey⁴, respondents now identify “mistrust/concerns about greenwashing” as the most significant deterrent to growth in responsible investing.
And all this comes just as the world is most in need of action. According to the United Nations Environment Programme (UNEP)⁵, we are now at risk of missing our Paris Agreement targets to limit the rise in global temperatures. Greenhouse gas emissions, writes UNEP, must be cut by 45% to avoid global catastrophe.
Boosting ESG investment confidence with data
For responsible investment firms, the challenge is to instill rigor in each ESG investment decision — and commit to portfolios with real-world impact. “The key is to look at a company’s data and history — and not the promises and marketing,” says Mike Thiessen, Chief Sustainability Officer at Genus.
Genus investors get a quarterly report detailing the Net Impact ScoreTM for their investments — a data-driven analysis that highlights the percentage of revenues generated from a portfolio company’s products or services aligning with the UN’s global sustainable development goals, or SDGs⁶. For impact funds, the target is more than half of revenues coming from positive impact activities, while Fossil FreeTM funds target a Net Impact Score above a pre-determined level.
As Thiessen explains, this approach — leading with data — differs from some of the more subjective analysis in the ESG space: “You’ll have an investment analyst who is answering a list of questions about each company such as ‘What are the impact goals for the company? Did they accomplish these goals? Are these goals meaningful? What are the risks of not accomplishing these goals?’” These qualitative questions can lead to discrepancies and confusion, he notes. One analyst could claim that a company’s impact activities really matter while another claims they don’t matter at all.
By partnering with leading ESG researchers MSCI and Impact Cubed, Genus is able to produce objective — not subjective — reports for clients. And this data helps cut through the ESG noise and confusion, which is fertile ground for greenwashing.
Beyond the numbers: Examining a company’s track record
Simple scores, however, are not enough. The key to an effective ESG investment strategy is understanding how a company’s actions affect scores over time. Thiessen and his team review each portfolio monthly, with new data from MSCI fed into the process. As Net Impact Scores change, some companies are dropped while others are added.
Thiessen points to Enphase Energy — a U.S. energy company that develops and manufactures solar energy technology — as one example of a company with positive momentum and an improving Net impact Score thanks to new investments in its technology. And, perhaps surprisingly, he also highlights Microsoft as an ESG standout.
Genus recently added the computing giant to its portfolios — largely thanks to Microsoft’s growing cloud-computing business, says Thiessen, “which is quite impactful because cloud computing is more energy efficient than local computing.” He also notes that Microsoft has been a corporate pioneer in setting greenhouse-gas goals⁷: “They were one of the first companies to set a net-zero emissions target by 2030, before it was cool to create a net-zero target. So they’re ahead of the game when it comes to sustainability.”
There is little doubt that the need for effective ESG investment strategies is more important now⁸ than ever before, given our climate emergency. Identifying companies that are committed to truly sustainable practices — and measuring them in a rigorous way through a Net Impact Score — is what will set an ESG investment strategy apart. It will also separate the hype from the reality⁹ in the field — bringing renewed confidence to ESG investing and those who promote it.
And with any luck, these strategies will help us make inroads in avoiding greenwashing and impact washing, meeting the UN’s Sustainable Development Goals and ensuring a more sustainable future.
References
- 2022 Canadian Responsible Investment Trends Report, RIA. (November 2022)
(2022) Is impact washing the new greenwashing?, Genus. Available at: https://genuscap.com/is-impact-washing-the-new-greenwashing/ (Accessed: 31 May 2023).
How to avoid greenwashing in ‘sustainable’ investing | CBC news (2022) CBCnews. Available at: https://www.cbc.ca/news/canada/british-columbia/is-sustainable-investing-greenwashing-1.6428906 (Accessed: 31 May 2023).
(2022) Canadian Responsible Investment Trends Report, RIA. (November 2022)
Environment, U. (no date) Emissions gap report 2022, UNEP. Available at: https://www.unep.org/resources/emissions-gap-report-2022 (Accessed: 31 May 2023).
(2022a) How our impact portfolios align with the United Nations’ Sustainable Development Goals, Genus. Available at: https://genuscap.com/how-our-impact-portfolios-align-with-un-sdgs/ (Accessed: 31 May 2023).
Unfccc.int. Available at: https://unfccc.int/climate-action/un-global-climate-action-awards/climate-neutral-now/microsoft-carbon-negative-goal (Accessed: 31 May 2023).
(2022c) Why ESG investing is here to stay, Genus. Available at: https://genuscap.com/why-esg-investing-is-here-to-stay/ (Accessed: 31 May 2023).
(2022a) ESG investing: Hype or reality?, Genus. Available at: https://genuscap.com/esg-investing-hype-or-reality/ (Accessed: 31 May 2023).
