Retail investors look at ESG through a much broader prism than fund managers and are susceptible to being sold financial products that aren’t as sustainable as they think they are, according to Lonsec head of sustainability research, Tony Adams.

While fund managers tend to focus on ESG considerations that affect the portfolio, investors take a more holistic view on ESG that encompasses more of the factors around them, Adams tells Professional Planner.

The result is a bifurcation of interests and a misalignment in what the ESG label signifies, he believes.

“ESG is a strange beast because what it means to the average person in the street and a fund manager is not the same thing,” Adams says.

“If you’re a portfolio manager and you’re looking at ESG you incorporate all those factors into the decision-making process for your assessment of the future value of that investment. And that’s completely legitimate, but for most people in the street that’s just doing the job properly,” Adams explains. “Most normal investors think about how ESG risks pertain to them and their society, their country or their children’s future. So they’re looking at it through a much broader prism.”

He gives the example of a company that is drilling for natural gas. To a fund manager, good governance might mean assessing things like the management of the company and the risk of future carbon taxes being imposed by the government. This may give the impression that the there is  minimal ESG risk to the company, he says, but the risk isn’t minimal to the planet. “And that’s where the concern of the investor lies,” he says.

Adams will be speaking on ESG categorisation within investment at the December 2 Professional Planner Digital Researcher Forum. To register, visit here.

Retail investors are putting pressure on managers to implement more robust ESG considerations, Adams says, but the difficulty lies in telling the difference between general ESG principles and genuine sustainable standards.

“Unfortunately you’re seeing two types; the ESG products and the real genuinely sustainable or ethical or values based products,” he explains. “Investors are struggling to tell the difference.”

Part of the problem is the UN-backed Principles for Responsible Investment network, he says, which has promoted its own ESG benchmark.

“The branding has been hijacked, in part by the PRI,” he says.

The PRI has the right intentions, Adams believes, and has done a good job of getting ESG discussed in more boardrooms. “But the principals are very broad,” he says.