The growing popularity of sustainable investment – and the controversies that surround them

Finding out how you should invest your money is not an easy task.

Now another wrinkle needs to be taken into account as there is a growing concern about “green laundry” in the financial world.

The term is used to describe misleading information about a company’s environmental performance and has become the focus of attention as people and governments pay more attention to the impact of companies on the environment and society.

Corporations and investors are also increasingly taking into account the risks associated with running a business through environmental, social and corporate governance (ESG).

The risks associated with the ESG range from a company’s carbon footprint to its work practices to the diversity of its workforce.

“Interest in ESG factors as part of investment decisions has clearly increased over time,” said Alexander Dyck, a professor of finance at the University of Toronto.

But also as authorities, pay more attention with regard to ESG estimates and disclosures, it is being discussed whether these investments are exactly what they claim to be.

On May 31, German police raided Deutsche Bank as part of an investigation into alleged green laundering by its asset management company. Recently, the U.S. Securities and Exchange Commission began investigating similar allegations related to Goldman Sachs.

In both cases, there is a suspicion that they overestimated the extent to which their investments were guided by the principles of the ESG.

The police vehicle arrives at the headquarters of the DWS Group, Deutsche Bank’s asset management unit, during a raid in Frankfurt, Germany on 31 May. (Alex Kraus / Bloomberg)

ESG is mainstream

The growing interest in the ESG is evidenced by the rapidly growing number of organizations that have become signatories to the Principles of Responsible Investment (UNPRI), an organization supported by the United Nations.

More than 4,000 investors have signed contracts with UNPRI, with more than $ 120 trillion in assets under their management. UNPRI is committed to six principles of responsible investing, the first commitment being to “integrate ESG issues into investment analysis and decision-making processes.”

There is a growing interest in sustainable investment among the public and especially young people.

According to the Royal Bank of Canada, their InvestEase business recorded a 56% increase in the number of “responsible investment” accounts on an annual basis. More than 50 percent of account holders are under 35 years old.

Different types of “sustainable” investment

Sustainable investment is an umbrella term used to describe the different ways in which non-financial factors are taken into account when deciding on investments.

The most common approach is the integration approach, where ESG factors are taken into account when deciding on a company or the composition of an investment. This approach can tilt the portfolio in favor of investments that have higher results on the ESG.

Corporate Social Responsibility (SRI) takes things a step further by completely eliminating certain types of investments, such as alcohol, tobacco or fossil fuels.

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Then there is effective investment, where the investor’s goal is to maximize social good with his investment.

The ESG integration approach is the most common of the three, Dyck said, noting that excluding sectors or industries from the portfolio is usually a financial expense.

“[The] Exclusion criteria are, in my view, a somewhat complicated path for most investors, as there is almost inevitably a cost that you don’t fully understand, ”he said.

How sustainable is sustainable?

One of the main controversies about ESG investments is how they are assessed.

Typically, investment managers decide which components of the ESG to highlight, and these preferences will guide decision-making, said Diane-Laure Arjaliès, an associate professor at Ivey Business School at Western University.

“There’s a variety of greens and so … something that’s organic for you may not be organic for someone else,” she said.

Investment managers will often use ESG data developed by themselves or credit rating agencies to make their decisions. But estimates from one agency to another may vary, depending on the weighting of different ESG criteria, which is sometimes another contentious point.

People often mistakenly assume that the purpose of applying ESG criteria is to maximize societal benefits, when in fact it is a framework for assessing risk to a company, says Alexandria Fisher, a sustainable finance expert who worked for institutional investors and government at ESG. .

“There is a fundamental misunderstanding of what ESG estimates are – and I think that causes tension,” she said. “They don’t show how the company actually affects the wider world.”

Last month, for example, Elon Musk called the ESG a “scam” after Tesla ranked lower than ExxonMobil on the ESG by S&P Global.

But Fisher said Tesla’s low score is not surprising to those in the field of ESG assessments, due to concerns about its overall social performance and management performance.

“Currently, there is a lot more discussion about climate risk and the environmental side when governance and social issues are equally important to a company with such a large supply chain,” Fisher said.

ESG standardization movement

When it comes to individual investors, green laundry is a big concern, Fisher said, because it’s hard to do your own research and financial advisors aren’t always well-trained for sustainable investment.

“The biggest change we need is more transparency [ESG] information, as well as standardized information, ”she said.

Standardized information may be on the way.

Wednesday is the formation Canadian Sustainability Standards Board (CSSB) has been published, with plans to become operational by April 2023. The CSSB will work with the International Sustainable Standards Board to develop international sustainability disclosure standards.

These international standards will be voluntary, said Lisa French, vice president of sustainability standards at the Audit and Assurance Standards Oversight Board, one of the two groups that approved the CSSB. Whether they become mandatory depends on securities regulators and regulators.

“What it does is ensure that all companies use the same set of standards,” French said. “So everyone is asked if they have to report the same elements and use the same methods, measurements and methodologies if they become mandatory.”

The development of disclosure standards would be beneficial for companies, ESG credit rating agencies and investors, the Frenchman said, as it would develop a level playing field.

“Having a structured approach to sustainable aspects, especially climate change – that’s good news for us as regular citizens.”

Elvira Parkinson

"Alcohol scholar. Hardcore tv junkie. Wannabe bacon enthusiast. Twitter fanatic. Subtly charming travel guru. Pop culture specialist."

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