Paul McQueen was recently talking to a client about investments, and when the topic of environmental, social and governance (ESG) investing came up, the conversation turned from making money to losing it.
“He used the phrase ‘go woke and go broke’ because he thought investing responsibly was going to lead to poor investment returns,” says Mr. McQueen, vice-president of wealth management at Libro Credit Union in London, Ont.
It depends on what you hear. Many studies touted by ESG champions, including a mega-analysis in one academic journal, show that companies with strong sustainability and corporate responsibility practices outperform their peers.
Such studies exist alongside a Harvard Business Review article from March that came to the opposite conclusion, finding that the highest-rated funds by sustainability attracted more capital than the lowest-rated funds, but didn’t outperform them. That article also suggested that some companies publicly embrace ESG to paper over their poor business performance.
Confusing and conflicting information, persistent myths about tradeoffs, and corporate “greenwashing” can all lessen the potential positive impact that responsible investing (RI) can make.
Canadians want these investments. A trends report from the Responsible Investing Association (RIA) noted that ESG assets under management had jumped 48 per cent over a two-year period. Another RIA report found that 73 per cent of investors have an interest in RI, and that 78 per cent would like a portion of their portfolio to be invested in companies that are providing solutions to reduce carbon emissions.
Despite huge marketing efforts by individual companies and funds around their ESG qualifications, the RIA revealed that 69 per cent of Canadian investors still know little to nothing about RI. Of those, 20 per cent have never even heard of responsible investing.
One issue is that there are few well-defined parameters within ESG, and even those can be “complex and overwhelming” for investors, says Christie Stephenson, executive director of the Peter P. Dhillon Centre for Business Ethics at UBC Sauder.
Each element of ESG has many facets, from labour to climate change to supply chain, which can be difficult to grasp, she explains. “There’s this unfortunate, simplistic view that there are ‘good’ companies or ‘bad’ companies, when in reality, ESG investing is a sophisticated set of strategies used by investors,” Ms. Stephenson says.
She adds RI isn’t about picking out the good and keeping out the bad. That’s another misconception. This type of investing includes identifying where companies are doing well with their ESG practices, where they come up short, and “using your power as an investor to drive change.”
Beware of greenwashing
For many investors, awareness of RI comes through their advisor. “Your advisor has to be able to have that conversation with you,” says Neil Chappell, portfolio manager and investment advisor at CIBC Wood Gundy in Victoria.
That presents another challenge. Advisors can find it tough to sift through all the marketing messages. The RIA says that while 85 per cent of the advisors surveyed said they are comfortable starting a conversation about RI, their knowledge of the subject remains relatively low.
“It’s a responsibility of advisors to be knowledgeable and guide investors, to say, ‘If these are the things that are important to you, here’s the options that are available and here’s how they fit in your overall plan,’” Mr. Chappell says.
For advisors and investors alike, one barrier to greater uptake is that much of the marketing around ESG is still just hype, leading to greenwashing campaigns.
The term refers to efforts by organizations to market themselves as green, in order to attract investors or customers, when their actual performance doesn’t warrant the label.
That has caused a lot of debate about how sustainable some investments really are.
Two ways to stave off greenwashing are to demand more transparency from companies, and to educate investors about the nuances of ESG. That includes getting the information out to the public in more digestible ways, so they won’t rely on outdated adages to guide their investments, Mr. McQueen says.
“Companies that are more sustainable, have better governance, have better diversity, and have a better awareness of their interaction with the communities they serve generally perform better. That evidence exists, but it comes back to education and awareness.”