Beware greenwashing as ESG momentum builds
Environmental, social, and governance principles are becoming increasingly popular in guiding investment decisions, but there's still some way to go, writes Nicki Bourlioufas.
Environmental, social, and governance principles are becoming increasingly popular in guiding investment decisions, but there's still some way to go.
ESG investing involves an investment process that includes some type of environmental, social, or governance consideration. The investment process involves the systematic inclusion of ESG information, and does not necessarily preclude investment in an organisation or country because of undesirable activity, according to a new paper from Vanguard.
ESG, SRI, and impact investing: A primer for decision-making also covers ESG-related activities including responsible investing, socially responsible investing, thematic investing and sustainable investing.
Locally, several funds managers have been launching new ESG and sustainability products.
Vanguard has launched two new ESG exchange-traded funds: the Vanguard Ethically Conscious International Shares Index Fund and ETF (VESG), and Vanguard Ethically Conscious Global Aggregate Bond Index Fund (VEFI). These remove companies involved in alcohol, tobacco, adult entertainment, fossil fuels, gambling, weapons and nuclear power.
They follow on from the March 2018 launch of the VanEck Vectors MSCI International Sustainable Equity ETF (ESGI), which covers both ESG and sustainable investing criteria.
Within the active funds space, the Ausbil Active Sustainable Equity Fund was launched in April, and the Australian Governance & Ethical Index Fund – a listed investment company – was rolled out in July.
Measuring ESG factors
Morningstar launched its global Sustainability Ratings in July 2016, using a methodology created in partnership with Sustainalytics, an ESG ratings specialist. These provide a reliable, objective way to evaluate how investments are meeting ESG criteria, helping investors put their money where their values are.
ESG investing is on the rise, but more work is needed locally
Anthony Serhan, managing director, research strategy, Asia-Pacific at Morningstar, says people are a lot more aware of environmental issues.
"At the same time, we have seen the mainstreaming of ESG factors within investment processes, driven by institutional investors taking a wider view of their responsibilities and by asset managers who see environmental and social issues driving investing outcomes for companies.
“What we are seeing now is a joining of these two forces. Investors looking to contribute to a better future are being met by a range of investment options that let them do this, and they still stack up from an investment perspective," Serhan says.
More work needed
But Serhan warns the industry is still in the early days of sustainable investing. “There has been a lot of ‘green washing’ of investment options just to capture this demand and broadly, the industry has not done a good enough job educating investors on what is a meaningful way to invest. Yes, this space has grown, but it has a lot further to go," he says.
Scott Keeley, a financial planner with Wakefield Partners, notes a steady increase in interest in these types of investments.
"The interest seems to be coming predominantly from our younger clients. Millennials that are starting out with share investing often want selected investments to have an ESG or sustainability filter applying to them.
"This group of investors are very socially aware and have no tolerance for any company with a history of corporate wrongdoing, or that have any negative impact on the environment, people or society in general," says Keeley.
He believes the provision of ratings on these criteria by respected research providers is a key positive, in simplifying the selection of appropriate ETFs and funds.
ESG information proliferates
According to the Vanguard report, ESG-related reporting is moving from the margins to the mainstream, as more than 11,700 public companies worldwide now disclose ESG indicators.
Growth in ESG screened indices has accelerated
Source: Vanguard calculations, using data from Morningstar, Inc.
"This proliferation of data, coupled with growing investor interest and technological advancements, has aided the ability of active managers to integrate material ESG issues into their due diligence process.
"It also has helped index providers construct a wider set of screened indices for asset managers to consider tracking to meet potential demand from investors with different moral preferences," according to the report.
In Australia, around $866 billion in assets under management was invested through some form of responsible investment strategy as at 31 December 2017, up 39 per cent year-on-year, according to the Responsible Investment Benchmark Report 2018 from the Responsible Investment Association Australasia (RIAA).
Leading superannuation funds are a big part of this move. Around 81 per cent of the largest super funds had embedded a formal commitment to responsible investing by the end of 2017, up from 70 per cent a year earlier.
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Nicki Bourlioufas is a contributor for Morningstar Australia. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
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