JPES Partners’ Donohoe: Investment industry faces a perfect green storm

Industry under greater scrutiny than ever before

Climate-tilted funds are misaligned with the goals of the Paris Agreement, 2050 net-zero goals already seem outdated and ex-employees are publicly questioning their former employers’ true ESG credentials.

The investment industry is facing far greater scrutiny than ever before with regards to ESG.

All of which has set the industry up for a perfect storm – and that was before a third of asset managers failed to meet the Financial Reporting Council’s criteria for being a signatory to the UK’s revised Stewardship Code.

JPES Partners’ fourth annual Asset Management Trends Report, which surveys changing perceptions among asset managers who collectively manage $12trn of assets, has shown that a fear of greenwashing – or rather of being seen to greenwash – runs deeply through these firms.

One firm, who did make the shortlist of signatories for the UK’s Stewardship Code, said they simply do not have the same desperation to be relevant anymore.

“We are ticking the box like everyone else but we have slowed down because we do not want to greenwash and we want to be better aligned. We do not want to be pioneers and get it wrong – I have seen competitors backtracking already.”

That does not detract from wider concerns about greenwashing by the industry, however of those surveyed, 76% of asset managers said they were concerned about greenwashing by peers; albeit that this is a near-20 percentage point drop from the 94% who said the same last year.

One of the reasons provided for this fading concern about greenwashing was the introduction of the Sustainable Finance Disclosure Regulation (SFDR) regime in March 2021, which imposed transparency requirements on asset management companies, which some felt would limit any manager’s ability to greenwash in the future.

Since the regime was introduced, however, several asset managers and industry bodies have claimed that the SFDR rules have created more confusion than clarity.

In fact, a Morningstar paper, SFDR: Four Months After Its Introduction, found that different approaches taken by firms to self-classification had resulted in a wide range of similar ESG approaches being represented in both Article 8 and 9 funds.

Regardless of how these products are classified according to SFDR, it has not stopped money pouring into sustainable and ESG-related funds throughout the pandemic.

Total assets in these vehicles climbed to $2.3bn by the end of June 2021, according to Morningstar, largely due to demand from European investors.

Yet after five consecutive quarters of growth, second quarter flows directed to these funds were down on the previous two quarters, suggesting that investors may have, at least temporarily, reached a saturation point.

The very idea of there being a tipping point for ESG will be anathema to most managers who have banked on it remaining a sure fire hit with investors.

86% of the asset managers we spoke to are expecting to launch new ESG-related products in the next 12 months, up considerably on 78% last year.

This plethora of solutions means it is hard to find an organisation that does not have some form of sustainable investment offering in place, yet increasingly more questions are being raised about what impact these products are truly having on the issues they purport to be tackling.

When asked what subset of the ESG debate they were focused on, climate was overwhelmingly the top response given by over 40% of asset managers compared with just 17% of respondents doing so in 2020.

Ahead of the COP26 Conference in November, it is perhaps not a surprise that climate remains top of mind. Of those who cited climate as a key area of focus, however, an astonishing 90% said they believed they were moving the needle on the ESG debate.

While the interviews were carried out prior to the publication of the IPCC report on climate change in August, the warning that the world is still not doing enough to limit global warming to 1.5°C, served as a stark reminder that even with the liberal adoption of 2050 net zero targets this year, we are simply not moving fast enough.

It is clear that some progress is being made by the industry collectively on turning words into action but for complicated issues such as climate change, the loftier the claim, the bigger the risk.

As one firm pointed out: “There are challenges and we need to be grown up about them… but if you brag about it then be prepared to be knocked down too. It is all about reputation, and the risk goes up the further out you go.”