The global head of sustainable investing at JP Morgan Asset Management has praised ASIC’s crackdown on greenwashing, but said the regulator should go further, with a clearer product labelling system.
On the sidelines of the asset manager’s international media summit in London last week, Jennifer Wu told Professional Planner that moves by ASIC are in-line with what is happening globally.
ASIC has taken action against Vanguard – over fossil fuels and tobacco – with other high profile actions coming against Morningstar, Mercer and Active Super.
“This is actually what the market needs,” Wu said.
“There are probably three areas globally that regulators are focusing on. We’ve got to a stage with sustainable investing such that clarity is needed, whereas at the very beginning of ESG, a lot of people thought ESG is no different from ethical investing or SRI [socially responsible investing].”
However, Wu noted there are so many “shades of sustainable investing” which could include the classic exclusions-based SRI investing; ESG integration, which is used to maximise risk adjusted returns; or impact investing, which involves companies seeking to have a tangible positive influence under ESG metrics.
“It’s not by way of mandatory exclusions or anything like that, but if I uncover a company’s practice as it relates to ‘G’ or treating employees poorly, I may decide to divest or engage with the company and promote them to change so I can create alpha for myself,” she said, explaining the value of ESG integration.
“The objective is I want to maximise returns.”
But what is missing, Wu said, is regulators stepping in to help classify different types of products to help retail investors understand what they are buying.
“Unlike with institutional investors, they have the teams and expertise to really scrutinize what is it that I need and if that matches what is being offered,” Wu said.
“What the Australia regulator did was really good and really looked at what is being offered. Hopefully they can come up with a classification system or a product labelling system that will just make it much clearer.”
Wu cited the UK as an example, where the regulatory framework has been changed to define sustainable investing products into four categories: focused, thematic, mixed goals, and impact.
“It’s not like one is better than the other, but as an investor you can choose which one is more suitable,” Wu said.
She also noted there needs to be a heightened regulatory focus on the ESG ratings industry and clarity over whether a company is labelled as sustainable because of its operations or because of what it produces.
“A good example is a tobacco company,” Wu said.
“They could be good in the first category, but the product is harmful for public health. The challenge we have as an industry with these ratings is what is this rating meant to measure.”
Wu said what would help the market is have two separate scores – one focusing on operational sustainability and the other focusing on the impact of the company.
“Then people can choose,” Wu said. “If I care about both then I want to choose a company that has high score across both categories.”
Editor’s note: the author attended the JP Morgan Asset Management International Media Summit as a guest of the asset manager.
I prepared a research proposal on this topic a number of years ago! Great to see we are moving forward in creating a delineation between what is actually ethical or socially responsible and what is a front to improve a company’s brand.