Despite ongoing efforts to clarify terminology and definitions around ESG, people are still expecting different things depending on who they are and what they are looking for.Pascal Rossignol/Reuters
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Recent criticisms of environmental, social and governance (ESG) investing practices, combined with global regulators’ efforts to begin cracking down on bad actors and establish more consistent standards in this space, are evidence of a maturing industry, according to a group of experts who participated in a recent panel discussion on responsible investing hosted by The Globe and Mail.
Lacking a common set of standards and metrics, ESG has been under attack in recent years. Former BlackRock Inc. chief investment officer for sustainable investing Tariq Fancy published an essay in August 2021 that questioned the value of ESG and, just last month, Tesla Inc. chief executive officer Elon Musk called ESG a “scam [that] has been weaponized by phony social justice warriors.”
David O’Leary, founder and principal at Kind Wealth in Toronto, places Elon Musk’s criticism “in the category of a temper tantrum,” while he says the commentary from Mr. Fancy “really does require some wrestling.”
“The recent pushback against ESG is a sign not only of a maturing market but that these things are actually affecting real change,” Mr. O’Leary said at the event. “We should all be willing to turn a mirror on ourselves and evaluate our own complicity in the process and the ways in which we can make changes.”
Sucheta Rajagopal, portfolio manager at Research Capital Corp. in Toronto, who has been focused exclusively on ESG-focused investing for the past two decades, says ESG “is at peak confusion right now because it has exploded so much in just the past couple of years and only now are we starting to put all the pieces in place.”
She adds that this “is leading to both pushback and claims of greenwashing, both of which have some legitimacy.”
Deborah Debas, senior responsible investment specialist at Desjardins Wealth Management in Montreal, says that despite ongoing efforts to clarify terminology and definitions, people are still expecting different things from ESG depending on who they are and what they are looking for.
“Greenwashing is very often in the eye of the beholder and comes down to mismatched expectations most of the time,” Ms. Debas says, adding that advisors who take the time to clarify their clients’ expectations can usually avoid greenwashing concerns.
Regulators around the world are also in the process of tackling greenwashing. Last month, German authorities raided the offices of Deutsche Bank and its asset management division DWS in Frankfurt after prosecutors found “sufficient indications” that ESG standards were applied only “in a minority of investments” despite the claims made in DWS marketing materials, according to a Deutsche Welle report.
Raids of that sort are indicative of the progress being made around the world toward establishing more standardized ESG metrics, says Ian Robertson, vice president, director and portfolio manager at Odlum Brown Ltd. in Vancouver.
Australia has already developed specific ESG labelling standards for funds, he says, and Europe is taking a pan-continental approach in saying these are the metrics that will allow you to label a fund as green or not.
Regulators in Canada are also turning their attention to ESG. The Canadian Securities Administrators came out with proposals last fall that will require Canadian-listed issuers to begin reporting climate-related risks and opportunities per a standardized framework, as well as their greenhouse gas emissions. Then, in January, the CSA issued guidance on how fund companies should disclose their investment approaches related to ESG issues in an effort to deal with the rise of greenwashing.
Furthermore, in late 2021, the Investment Industry Regulatory Organization of Canada (IIROC) issued guidance for advisors to “provide their clients with the opportunity to express their investment needs … in accordance with [ESG] criteria or other personal preferences.”
Those new requirements give advisors the chance to get to know their clients at a different level, Mr. O’Leary says.
“That changes your client retention and referrability radically,” he says. “There are clear business cases to [discuss ESG issues with clients] and the most rewarding conversations I have with people are those discussions.”
Historical context is also important, Mr. O’Leary adds, as “we are still in the first or second inning of all this [trend].”
People have been investing for thousands of years using only the two dimensions of risk and return, he says. Now, all of a sudden we have awoken to the fact that there is a third dimension – an impact element.
“That third dimension is the most complex dimension by far,” Mr. O’Leary says. “We are still babies at this.”
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Jameson Berkow