During a keynote on 23 June, Barnett Waddingham partner David Moreton and investment consultant Eva Grace said that there is still a fair amount of greenwashing that goes on in the industry, and that green labels do not always tell the whole story.
One of the challenges is ESG integration, which is where a manager can identify relevant ESG issues and address their impact on the performance of the companies that they hold.
Grace explained: “This can be a very tricky area because companies are generally not black or white, good or bad. A company that’s excelling in tackling climate risk can have poor social impacts or vice versa. So, it’s important that managers are able to identify each of these issues and assess the impact.”
For example, Tesla has done a great deal for electrifying the auto industry, but it does not score highly on social or governance factors.
“So, it’s a case of whether you can tolerate that in exchange for the environmental benefits, and that’s a really difficult question to answer,” said Grace.
Sustainability, which is about the assets the manager invests in and whether they are ‘walking the walk as well as talking the talk’, can help consultants start to spot manager greenwashing, she added.
A recent interesting example of this is the controversial digital currency Bitcoin. As Grace said: “We’ve seen some managers add Bitcoin to their portfolios even though they’ve got very strong ESG integration statements. Bitcoin has ESG issues from the energy it takes to power the servers that hold it and mine it – to the fact that it is unregulated so some people believe it’s being used to fund criminal activity.
“This probably seems like quite an obvious statement but just because a fund is labelled a sustainable doesn’t necessarily mean it fits with the trustees’ definition of sustainability.”
The EU’s new Sustainable Finance Disclosure Regulations (SFDR) are expected to help with the consistency of defining sustainability for funds. But Grace pointed out that a lot of managers say they invest in sustainable businesses, “which to them means businesses that will be around for a long time – but that might not necessarily tie up with the definition of sustainability from an environmental factor.”
“So, there’s a lot to consider from an investment fund perspective, but there’s also some slightly different considerations at an individual asset class level as well,” she added.
A note of caution also applies to green bonds, according to Moreton. “The particulars of each bond are important, and working with a manager who has a definite and rigorous process is definitely important.”
For example, an asset manager was recently looking at a green bond on behalf of Barnett Waddingham.
“There was a whole list of green initiatives that [the issuer company] was looking to support,” said Moreton. “However, when we looked at the particulars of that bond, it was going to pay down existing debt with financing for green projects taking place in future when finances allowed, so it was hard to figure out the direct impact of that green bond in those circumstances.”