Member, Macau Institute for Corporate Social Responsibility in Greater China (MICSRGC)
Currently, more and more institutional and individual investors are considering ESG (environmental, social and governance) factors alongside financial indicators in making their investment decisions. According to the Global Sustainable Investment Review 2020 published by the Global Sustainable Investment Alliance, global ESG investment has reached USD35.3 trillion in five major markets, namely Europe, the US, Canada, Australasia and Japan, representing a 15% increase over the past two years. ESG-related investments under management are on the rise. They made up a remarkable 35.9% of total assets under management in 2020 alone.
Preferences of individual investors are changing. There is a growing interest among them to achieve a more sustainable lifestyle and build a better future by making some contribution to the environment and society through ESG investments. As a result, companies worldwide have been under increasing pressure to attend to ESG issues in their impact on their company performance and stock prices. Fund houses, too, have been keen on launching ESG-themed products as they consider this a key area of growth.
Riding on this trend, many new investment products, such as funds, bonds and stocks which label themselves as “sustainable”, “responsible” and “ethical”, have emerged as part of the ESG investment boom in recent years. However, it has been discovered that many so-called green and ethical ESG investment products may not have invested in quite the way they proclaim. One recent example is that a fund labelled as “fossil-fuel-free” may exclude companies with ownership of oil and gas reserves but not oil refining. Another case is about a company claiming to be environmentally conscious while quietly lobbying against policies designed to tackle climate change, which is commonly known as “greenwashing”.
But why would this happen? There have been a lot of investments under different ESG labels. Terms, such as “sustainable”, “responsible” and “ethical”, have been used in vague ways. So, individual investors are being misled. In some cases, even finance professionals may not have enough experience and knowledge in ESG to give proper advice to investors. Furthermore, there are no uniform standards and requirements for ESG disclosure, or benchmarks for measuring the claims by different parties, such as fund houses, bond issuers and rating agencies, to avoid greenwashing. Indeed, currently there are very few tools (such as company sustainability reports and annual reports) available for individual investors to evaluate if the companies or funds that they are investing in actually engage in ESG activities.
Nevertheless, changes are underway to provide transparent and standardized guidelines for investment decision making. Practitioners and regulators worldwide are setting up new regulatory initiatives to strengthen the transparency and veracity of ESG claims and avoid greenwashing. For instance, the International Sustainability Standard Board (ISSB) promises to develop common standards for companies to report their sustainability performance to investors. If successful, this could become a global reporting standard for ESG activities.
With at least 34 regulatory bodies and standard setters in 12 markets undertaking official consultations on ESG in 2021 alone, more time is needed for a unifying body of regulations to be established. In the meantime, instead of just relying on hearsay, individual investors need to be constantly reminded to obtain detailed information from their professional financial advisors regarding the ESG activities of the companies and funds they invest in. Besides, they are advised to refer to the ESG ratings of investment products compiled by different international rating agencies for comparison. Investors are also encouraged to consider other investment products where possible.
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