Earlier this month Channel 4 News had a considerably detailed segment devoted to environmental, social and governance (ESG). It is no secret that ESG has gained prominence in the asset management industry in recent years but when it reaches into our daily news shows, we really know it is going mainstream.
After years of a few boutique managers banging the ESG drum, investors can now access anything from clean technology funds to gender diversity and climate change-focused ETFs. There are now investment opportunities to meet every demand, so why is this the case?
The Greta Effect – A more informed audience drives investor demand, which in turn leads to innovation in order to meet consumer needs. Household names such as, Greta Thunberg and television shows including David Attenborough’s Blue Planet II have inspired the public, governments and investors, to really begin thinking about the impact of their actions. Likewise environmental movements such as Extinction Rebellion and the UN PRI Portfolio Decarbonization Coalition have demonstrated a tipping point in the language around, and support for, what is becoming known as a climate emergency.
Opportunity – The availability of specialised products that focus on definitive environmental and societal themes, combined with the creation of new indices, such as the MSCI World ESG Leaders Index, forms a benchmark to measure against. Likewise, the saturation of information and the breadth of stakeholders (encompassing energy, water, banks and the retail sector) tapping into the sector practically inundates prospective investors with options.
Transparency – A drive for disclosure of companies’ climate-related sustainability actions means that accountability has never been higher. In the past 12 months, the Task Force on Climate-related Financial Disclosures (TCFD) has seen a global leap of 26% in the number of companies aligning to the TCFD’s recommendations. These focus on the core elements of how organisations operate; their governance, strategy, risk management, and metrics and targets concerning climate related-risks.
Greenwashing – On the flip side, if a fund is labelled as sustainable or climate-friendly how does an investor check these ESG claims are legitimate? Some are changing the names of existing funds, products and strategies with little alteration to the actual vehicle. For instance they may make simple exclusions but still invest in companies with low ESG scores, or integrate such policies into their own operations.