OPINION
‘Green washing’ rife as ethical investing dollars roll in
Stephen Bartholomeusz
Stephen Bartholomeusz
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.
‘Green washing’ rife as ethical investing dollars roll in
Stephen Bartholomeusz
Senior business columnist
April 27, 2021 —
The Australian Council of Superannuation Investors’ threat to vote against the re-election of directors of companies that don’t respond adequately to climate-related risks is another strand in a global and accelerating trend towards fund manager activism on environmental, social and governance issues.
While ACSI’s track record on activism is fairly solid – its predominantly industry fund base has tended to put its money where its mouth is – that’s not necessarily, however, the case for all funds that have joined the scramble in recent years to label themselves as ethical investors.
If companies want a social licence to operate and to lower their costs of capital and fund managers want to attract funds and generate income from ESG-aware investors they now have to have policies, and practices, that meet the new and strengthening community and investor expectations. CREDIT:JONATHAN CARROLL
Indeed, there is considerable “green washing” occurring as fund managers try to exploit the flood of investor money into ESG-labelled funds, particularly those that portray themselves as active on climate change-related issues.
The pace of that flow of funds into sustainable investing has accelerated sharply since 2019. In the US last year an estimated $US51 billion ($65.5 billion) flowed into ESG funds, twice the level of 2019. Globally the sustainable investment industry is now thought to manage more than $US3 trillion of funds.
The fund managers are being drawn to sustainable investing because the increased interest of investors in investing with a social conscience means that’s where the money and the management fees are heading.
It’s also where the superior returns are. There’s been a lot of research to show that ESG funds produce better returns than funds that don’t have an ESG overlay.
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It is unclear whether that’s because the companies they invest in have management more in tune with their communities; attract better employees or whether the flows of funds from “socially responsible” investors have a positive impact on share prices and funds returns.
With the Biden administration in the US planning to spend $US1 trillion on climate-related policies over the next eight years and most of the major economies committed to reducing carbon emissions the size of the ESG industry is likely to swell much further as fund managers look to get their share of the trillions of dollars that will flow into climate-related investment.
How true-to-label these funds are is going to be a question of increasing interest to companies, investors and regulators as the size and influence of the sector grows.
There are plenty of stories of large funds with supposed ESG investment credentials that hold shares in companies that don’t conform to their stated policies, or vote contrary to their stated ESG policies or don’t vote at all on contentious ESG-related issues.
The fund managers are being drawn to sustainable investing because the increased interest of investors in investing with a social conscience means that’s where the money and the management fees are heading.
Earlier this month the US Securities and Exchange Commission issued a “risk alert” for investment advisers and funds related to ESG investing.
The SEC has, for several years, been reviewing the practices of funds that profess to be socially responsible investors and which market themselves as investing only in companies that are pursuing ESG-supportive strategies.
In 2019 it wrote to fund managers and asked them for lists of the stocks they were invested in or their advisers had recommended; for the models and processes the managers used to assess the ESG credentials of the companies they invested in and for their proxy voting records on ESG-related issues.
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It found inconsistencies between the funds’ practices and their public disclosures of their ESG approaches; weaknesses in their policies and procedures and inadequate controls to monitor and update clients’ ESG-related investing guidelines; differences between their proxy voting claims and their internal policies and procedures; unsubstantiated and misleading claims about their ESG investing and inadequate controls over their public disclosures and marketing materials to ensure they were consistent with the firms’ practices.
The disparities between what some fund managers preach and what they practice is an analogous issue to companies that claim to have ESG policies or emissions-reduction policies but, at a practical level, are doing nothing substantial to reduce their emissions.
They are all seeking the halo effect – and the capital – associated with being seen to be on the right side of the climate change debates, or meeting evolving societal expectations. For companies with otherwise less-than-green credentials, they are also trying to head off the threat of shareholder activism
“Green equity” and “green bonds” (there are about $US1.6 trillion of “sustainable finance” bonds on issue) are a relatively new reality for companies and investors.
Even the ultra-conservative US Business Roundtable has acknowledged the significance and permanence of the change in community attitudes and values.
In the US last year an estimated $US51 billion flowed into ESG funds, twice the level of 2019.CREDIT:AP
In 2019 it ditched its core principle that the paramount duty of boards and management is to their shareholders. It broadened that duty to include all stakeholders and issues such as diversity, social inclusion and the environment.
If companies want a social licence to operate and to lower their costs of capital and fund managers want to attract funds and generate income from ESG-aware investors they now have to have policies, and practices, that meet the new and strengthening community and investor expectations
Whether they do that cynically or with conviction is almost irrelevant. It’s in their self-interest to be seen to be socially responsible boards, managements and fund managers.
RELATED ARTICLE
Global warming
‘We will take action’: Investors target ASX’s climate-laggard directors
That makes it important that end-investors aren’t misled by either the companies or the fund managers and that regulators, the Australian Securities and Investments Commission in our case, scrutinise the policies and behaviours they espouse and assess the extent to which they actually live up to those promises and have the internal policies and controls to ensure that they do.
The US SEC has a particular taskforce policing climate risk disclosures and said recently that it would boost its investigations of fund managers and companies this year to make sure that their public statements align with their strategies. It is also working on new and more consistent guidelines for companies and fund managers on ESG and climate-related disclosures.
There is a similar opportunity here for ASIC and the ASX to create a framework for consistent disclosure of ESG-related policies and actions as well as for ASIC (and perhaps the Australian Competition and Consumer Commission) to ensure that investors aren’t misled by fund managers whose investing and voting practices are at odds with their publicly-stated policies.
ACSI’s actions add a layer of self-regulation for its members alongside the threat to boards but it represents only a relatively small, albeit influential, part of the larger market but more will need to be done if both companies and fund managers are to be held to account for their assertions on ESG-related issues.
April 27, 2021 —
The Australian Council of Superannuation Investors’ threat to vote against the re-election of directors of companies that don’t respond adequately to climate-related risks is another strand in a global and accelerating trend towards fund manager activism on environmental, social and governance issues.
While ACSI’s track record on activism is fairly solid – its predominantly industry fund base has tended to put its money where its mouth is – that’s not necessarily, however, the case for all funds that have joined the scramble in recent years to label themselves as ethical investors.
If companies want a social licence to operate and to lower their costs of capital and fund managers want to attract funds and generate income from ESG-aware investors they now have to have policies, and practices, that meet the new and strengthening community and investor expectations. CREDIT:JONATHAN CARROLL
Indeed, there is considerable “green washing” occurring as fund managers try to exploit the flood of investor money into ESG-labelled funds, particularly those that portray themselves as active on climate change-related issues.
The pace of that flow of funds into sustainable investing has accelerated sharply since 2019. In the US last year an estimated $US51 billion ($65.5 billion) flowed into ESG funds, twice the level of 2019. Globally the sustainable investment industry is now thought to manage more than $US3 trillion of funds.
The fund managers are being drawn to sustainable investing because the increased interest of investors in investing with a social conscience means that’s where the money and the management fees are heading.
It’s also where the superior returns are. There’s been a lot of research to show that ESG funds produce better returns than funds that don’t have an ESG overlay.
RELATED ARTICLE
Investing
‘Seismic shift’: Aussies grasp the power of ethical investing
It is unclear whether that’s because the companies they invest in have management more in tune with their communities; attract better employees or whether the flows of funds from “socially responsible” investors have a positive impact on share prices and funds returns.
With the Biden administration in the US planning to spend $US1 trillion on climate-related policies over the next eight years and most of the major economies committed to reducing carbon emissions the size of the ESG industry is likely to swell much further as fund managers look to get their share of the trillions of dollars that will flow into climate-related investment.
How true-to-label these funds are is going to be a question of increasing interest to companies, investors and regulators as the size and influence of the sector grows.
There are plenty of stories of large funds with supposed ESG investment credentials that hold shares in companies that don’t conform to their stated policies, or vote contrary to their stated ESG policies or don’t vote at all on contentious ESG-related issues.
The fund managers are being drawn to sustainable investing because the increased interest of investors in investing with a social conscience means that’s where the money and the management fees are heading.
Earlier this month the US Securities and Exchange Commission issued a “risk alert” for investment advisers and funds related to ESG investing.
The SEC has, for several years, been reviewing the practices of funds that profess to be socially responsible investors and which market themselves as investing only in companies that are pursuing ESG-supportive strategies.
In 2019 it wrote to fund managers and asked them for lists of the stocks they were invested in or their advisers had recommended; for the models and processes the managers used to assess the ESG credentials of the companies they invested in and for their proxy voting records on ESG-related issues.
RELATED ARTICLE
Climate policy
Where Australia stands as the world resets on climate change
It found inconsistencies between the funds’ practices and their public disclosures of their ESG approaches; weaknesses in their policies and procedures and inadequate controls to monitor and update clients’ ESG-related investing guidelines; differences between their proxy voting claims and their internal policies and procedures; unsubstantiated and misleading claims about their ESG investing and inadequate controls over their public disclosures and marketing materials to ensure they were consistent with the firms’ practices.
The disparities between what some fund managers preach and what they practice is an analogous issue to companies that claim to have ESG policies or emissions-reduction policies but, at a practical level, are doing nothing substantial to reduce their emissions.
They are all seeking the halo effect – and the capital – associated with being seen to be on the right side of the climate change debates, or meeting evolving societal expectations. For companies with otherwise less-than-green credentials, they are also trying to head off the threat of shareholder activism
“Green equity” and “green bonds” (there are about $US1.6 trillion of “sustainable finance” bonds on issue) are a relatively new reality for companies and investors.
Even the ultra-conservative US Business Roundtable has acknowledged the significance and permanence of the change in community attitudes and values.
In the US last year an estimated $US51 billion flowed into ESG funds, twice the level of 2019.CREDIT:AP
In 2019 it ditched its core principle that the paramount duty of boards and management is to their shareholders. It broadened that duty to include all stakeholders and issues such as diversity, social inclusion and the environment.
If companies want a social licence to operate and to lower their costs of capital and fund managers want to attract funds and generate income from ESG-aware investors they now have to have policies, and practices, that meet the new and strengthening community and investor expectations
Whether they do that cynically or with conviction is almost irrelevant. It’s in their self-interest to be seen to be socially responsible boards, managements and fund managers.
RELATED ARTICLE
Global warming
‘We will take action’: Investors target ASX’s climate-laggard directors
That makes it important that end-investors aren’t misled by either the companies or the fund managers and that regulators, the Australian Securities and Investments Commission in our case, scrutinise the policies and behaviours they espouse and assess the extent to which they actually live up to those promises and have the internal policies and controls to ensure that they do.
The US SEC has a particular taskforce policing climate risk disclosures and said recently that it would boost its investigations of fund managers and companies this year to make sure that their public statements align with their strategies. It is also working on new and more consistent guidelines for companies and fund managers on ESG and climate-related disclosures.
There is a similar opportunity here for ASIC and the ASX to create a framework for consistent disclosure of ESG-related policies and actions as well as for ASIC (and perhaps the Australian Competition and Consumer Commission) to ensure that investors aren’t misled by fund managers whose investing and voting practices are at odds with their publicly-stated policies.
ACSI’s actions add a layer of self-regulation for its members alongside the threat to boards but it represents only a relatively small, albeit influential, part of the larger market but more will need to be done if both companies and fund managers are to be held to account for their assertions on ESG-related issues.
Stephen Bartholomeusz
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.
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