Advisers have been receiving an increasing number of clients asking about ESG investments but the lack of standards around disclosure is creating obstacles for advisers.
Several institutions – including the Sustainability Accounting Standards Board – are, however, working to form these standards.
Speaking at the Professional Planner Researcher Forum, Zenith Investment Partners head of responsible investment and sustainability Dugald Higgins said Australia remains quite limited with how it approaches fund transparency and holding data.
“If you’re an ethically-driven investor and you can’t see a fund holdings data you’re effectively blind dating because you don’t know what’s in that portfolio,” Higgins said.
Despite this, he said funds are passing the age of rhetoric and into accountability.
“A big part of where we’re at now with looking at funds and how the industry presents itself,” Higgins said. “The big difference we have right now is move from ‘tell us what you’re doing’ to ‘show us what you’ve done’.”
Higgins added a big part of how this new age will work is transparency.
“Transparency is key – transparency in the process, transparency in the holdings, transparency in stewardships, in actions, in outcomes, transparency in metrics like carbon.”
ESG v sustainable v responsible investing
Higgins said the industry often conflates ESG and sustainability, clarifying that ESG is looking at external factors that can impact a company’s value while everything a company does that impacts the world is sustainability.
“If you’re confusing ESG and just an investment process inside a portfolio that’s only designed to look at risks and opportunities and then mixing that up with a company that’s trying to be sustainable… they’re not necessarily the same thing,” Higgins said.
Ethinvest general manager Fiona Thomas said there are many ways to keep track of what is occurring within the ESG investing space.
“For an investment to be classified as an impact investment for us [Ethinvest], there needs to be a precise measurement process in place.”
Thomas believes people do not understand the difference between ESG factors, responsible investing, and sustainable investing.
“The other things they don’t do is google ESG advice or ESG investing, that’s not how people view the world so they will say ethical investing or responsible investing. There are terms other than ESG that are far more understood by the general public.
Thomas said Ethinvest does in-house research to take the complexity out of the range of terms and products for clients.
“[Reviewing the] strategy, the intention, breaking down the holding of the funds and then we give them a rating,” Thomas said.
“We try to simplify what is a very complex decision. We do the research for our clients; we don’t expect them to understand the difference.”
The greenwash
Since ESG investing came into existence, greenwashing has become an issue but this year the regulator has begun a crackdown on misleading marketing practices in responsible investing, with Vanguard being the latest culprit.
ASIC defines greenwashing for investors as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”. This definition has caused several funds to scramble through their marketing material and revise it.
Thomas said she was pleased by ASIC’s initiative and the acknowledgement of greenwashing as problem.
“Because we’ve been operating in this space and with clients that care about this for so long, we were pleased to see there would be penalties for companies that make false claims,” Thomas said.
“It makes it easier for good fund managers that are doing the right thing to not be mixed up in the swill of everybody launching a product because there is so much coming to market.”
CFS head of investment sales George Walker said with ESG becoming mainstream and reaching the mass affluent it was natural that greenwashing would happen.
“You want to make sure you’re standing behind what you do and you’re authentic,” Walker said.
“We’re really big on reporting – making sure we can come back and prove you said what you’re going to do is happening.”
Zenith was acquired by European-based analytics research house FE fundinfo in late 2021, which Higgins said has given his research firm greater perspective across how ESG regulations work in different markets.
He added he saw the industry in Australia going down either a prescriptive or principals-based path for ESG regulation.
“Prescriptive guidelines, which they have in Europe, they’re good as guiderails but products are so nuanced it ends up being a poor fit,” Higgins said.
“Principles-based guidelines, which is essentially what ASIC has done, gives you a great deal of flexibility and the ability to future proof against the inevitable shifts in the landscape. The problem is you’re subject to interpretation.”
