Opinion: Will ESG investment strategies ever be 'good' enough?

For all the frameworks and taxonomies that have emerged, the industry still lacks a gold standard for ESG investing, leaving investors to make do as social and regulatory pressures mount.
Opinion: Will ESG investment strategies ever be 'good' enough?

The CIO of a sovereign wealth fund once mentioned to me that there are so many conflicting messages about investment strategies that you are often forced to make the decision that you believe best suits your fund and make it work.

A similar thinking applies to environmental, social and governance (ESG) investing. Fact is, if you looked hard enough, you could poke holes in any ESG investing strategy. That’s the problem with wanting to do good – there is no such thing as “good” enough.

An investment firm could decide to focus on climate, endeavour to slash its greenhouse gas (GHG) emissions, and take the divestment route. But what happens when private investors swoop in on the “dirty” companies that had just been dropped?

Or what happens to the families in developing markets who rely on coal-produced energy during the winter to keep warm? Or the millions of workers whose livelihoods depend on an entire industry such as palm oil?

In 2017, millions were left freezing as China attempted to cut coal-burning emissions during the winter.  In Indonesia, as many as 3.7 million people are believed to be employed in the palm oil industry.

A shift away from these industries needs to happen, but transitions of such a large scale do not happen overnight. If financing were to be pulled immediately, great social repercussions would undoubtedly occur.

Many major institutional investors such as Temasek, CPPIB and Cathay Financial Holdings, to name a few, have opted for the engagement route, where they work actively with portfolio companies to encourage and guide them through a transition process.

Some, such as Cathay, do a mix of both. If an investee firm fails to meet targets or demonstrates a reluctance to commit to transition, then the fund will divest from the company.

Funds that choose to actively engage with portfolio firms have faced accusations of hypocrisy and greenwashing. Canadian pension funds for instance have faced backlash for their continued allocations to fossil fuels.

Greenwashing accusations have certainly rocked the asset management industry, driving institutional investors to be more measured in their communications.

READ ALSO: Asian investors growing more doubtful over ESG: survey

Investors have also called for better standards and measurements, which have evolved and improved drastically through the years, but they remain far from perfect. And these often apply only to the public markets, while private markets are left to their own devices.

Markets, such as the EU, Asean and Singapore have published taxonomies for sustainable finance and existing frameworks for ESG reporting do exist, for instance the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB).

And we haven’t even gotten to the “social” in ESG yet.

READ ALSO: Social metrics and definitions lag climate but that’s no excuse to ignore them

Market practitioners AsianInvestor spoke generally agreed that while larger investors have the resources to properly integrate ESG into their portfolios, the smaller firms do not. ESG integration costs time and money, which, in their opinion, could be better spent increasing returns.

And even though sustainable funds have proven to be able to outperform benchmarks, some portfolio managers remain unconvinced.

Ultimately, however, institutional investors will be forced by regulator-imposed mandatory disclosures to play ball.

So until there is a definitive guide on what the gold standard for ESG investing is, investors have no choice but to adopt a strategy they believe in, define their measures of success and stay the course.

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