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Even if you’re familiar with the acronym ESG, you may not know exactly what defines strong environmental, social and governance practices.
It’s a source of confusion for some investors and advisors, says Deborah Debas, Senior Responsible Investment Specialist at Desjardins Wealth Management.
“It’s never black and white. It really is more 50 shades of green.”
As responsible investing (RI) has taken hold, there are growing numbers of funds where managers evaluate and integrate ESG risks and opportunities in making investment decisions. The CFA Institute has issued standards for ESG disclosure, which cover how to talk about a fund product but not how to design it. Many labels are tossed around to describe investment options, and it can be hard to make sense of it all.
“This is where the nuances, data and research become extremely important. Our portfolio managers use these set of ESG criteria to enhance their traditional financial analysis,” Ms. Debas says.
She adds that for the Desjardins RI lineup, as many as 100 people are actively working on evaluating and making investment decisions, doing ESG analysis, and undertaking the shareholder engagement that makes everything come together.
Responsible investors and their advisors want to know if a fund is truly delivering what it promises. Ms. Debas says it’s essential to “look under the hood.”
Considering the makeup of a fund, what are the ESG history and practices? What ESG approaches are being used? What are the intentions? Are claims backed up with data? What’s being done to improve ESG practices? Is the fund manager engaging with companies to improve those practices and enhance financial performance? The answers can help to reveal a fund’s RI integrity.
Beware of greenwashing
The lack of a uniform way to describe ESG not only makes it tougher to answer those questions, it can also lead to “greenwashing”. According to the CFA Institute, that’s where “disclosures or advertising materials intentionally or inadvertently mislead investors about the ESG approaches used in an investment product, the ESG characteristics of an investment product, or the degree of influence that an investment product has on ESG issues.”
In a recent survey of advisors conducted by the Responsible Investment Association (RIA), 81 per cent of respondents expressed concern about greenwashing, and 74 per cent expressed concern about lack of standards.
Advisors should be looking for authentic and robust ESG integration, clear explanations on the ESG approaches used, transparency about the portfolio securities, and data and reporting to back up claims about engagement and positive outcomes.
Those needs underscore the importance of the efforts by specialists such as Desjardins, which deeply understand the ins and outs of ESG and can sift through all of the information – or misinformation.
Look at the goals of RI broadly
Ms. Debas notes that there’s no one-size-fits-all solution when it comes to RI and ESG. Sometimes people liken it to a filter system – a way to weed out the so-called good companies from the bad. While this is often true, it’s also a simplistic and not particularly useful way to look at ESG as a whole, she explains.
There are no perfect companies out there. It’s important for every investor to ask themselves what types of outcomes they would like to promote with their money. Then they can look at which investments might help them achieve those goals, for the environment and communities, and for themselves financially.
ESG funds are known to perform well over the long-term, according to an MSCI study of more than 1,600 securities. Over a 10-year period, companies that followed ESG best practices tended to be more profitable and pay higher dividends, while having lower residual risks, less systemic volatility and a superior valuation.
With ESG terminology still leaving a lot of room for interpretation, Ms. Debas says there’s a premium on trusted portfolio managers, information and funds. That will go a long way toward helping Canadians align their investment objectives and values.
Advertising feature produced by Globe Content Studio with Desjardins. The Globe’s editorial department was not involved.