Paul McQueen was talking to a client about investments recently, and when the topic of environmental, social and governance (ESG) investing came up, the conversation went from making money to losing money.
“He used the phrase ‘wake up and go broke’ because he thought investing responsibly would lead to low returns,” says McQueen, vice president of wealth management at Libro Credit Union in London. , Ontario.
It depends on what you hear. Many studies touted by ESG champions, including one mega-analysis in an academic journal, show that companies with strong sustainability and corporate responsibility practices outperform their peers.
Such studies exist alongside a harvard business review March article that came to the opposite conclusion, finding that funds with the highest sustainability ratings attracted more capital than the lowest-rated funds, but did not outperform them. This article also suggested that some companies are publicly adopting ESG to mask poor business performance.
Confusing and contradictory information, persistent myths about trade-offs and corporate “greenwashing” can all dampen the potential positive impact responsible investing (RI) can have.
Canadians want these investments. A trend report from the Responsible Investing Association (RIA) noted that ESG assets under management jumped 48% over a two-year period. Another one RIA report found that 73% of investors have an interest in RI and that 78% would like a portion of their portfolio to be invested in companies that provide solutions to reduce carbon emissions.
Despite huge marketing efforts by individual companies and funds around their ESG qualifications, the RIA found that 69% of Canadian investors still know little or nothing about RI. Of these, 20% have never even heard of responsible investing.
One problem is that there are few well-defined metrics within ESG, and even these can be “complex and overwhelming” for investors, says Christie Stephenson, executive director of the Peter P. Dhillon Center. for Business Ethics at UBC Sauder.
Each element of ESG has many facets, from labor to climate change to supply chain, that 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,” says Ms Stephenson. .
She adds that RI is not about choosing the good and discarding the bad. This is another misconception. This type of investing includes identifying where companies are doing well with their ESG practices, where they are failing, and “using your power as an investor to drive change.”
Beware of greenwashing
For many investors, knowledge of RI comes through their advisor. “Your advisor needs to be able to have that conversation with you,” says Neil Chappell, portfolio manager and investment advisor at CIBC Wood Gundy in Victoria.
This presents another challenge. Advisors can struggle to sift through all marketing messages. The RIA says that while 85% of advisors surveyed say they are comfortable starting a conversation about RI, their knowledge of the topic remains relatively low.
“It’s the advisers’ responsibility to be knowledgeable and guide investors, to say, ‘If these are the things that are important to you, here are the options that are available and here’s how they fit into your plan. global’,” says Chappell. .
For advisors and investors, one of the barriers to greater adoption is that much of the marketing around ESG is still just hype, leading to greenwashing campaigns.
The term refers to organizations’ efforts to market themselves as green, in order to attract investors or customers, when their actual performance does not justify the label.
This has sparked a lot of debate about the actual sustainability of certain investments.
Two ways to avoid greenwashing are to demand more transparency from companies and to educate investors on the nuances of ESG. That includes delivering information to the public in a more digestible way, so they don’t rely on outdated adages to guide their investments, 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. This proof exists, but it comes down to education and awareness.