Identifying genuine ESG standards becomes increasingly complex as companies market their practices, says RisCura Investment Strategist Glenn Silverman.
ESG investing, which focuses on environmental, social and governance factors, is gaining popularity among investors, but identifying companies that genuinely adhere to ESG standards can take time and effort. Some companies engage in “greenwashing” practices to appear more sustainable and attract more assets.
According to Glenn Silverman, Investment Strategist at RisCura, identifying and addressing greenwashing has become an increasingly critical part of RisCura’s due diligence on any asset manager’s investment process. Greenwashing refers to making false or misleading claims about an investment product’s environmental practices to appear greener.
ESG disclosure standards provide a framework, but they cannot make ethical judgements about whether a company or security is good or bad. “ESG issues are interlinked in all sorts of ways, and a company that performs well on governance or social issues might be awfully bad for the environment. This requires an ethical or value judgement as well as a deep understanding of what issues are genuinely material to a sector or industry, and any company within such, which is also very complex,” said Silverman.
Several factors have driven the rise of ESG investing, including societal pressures, such as client demand, the growing evidence of the direct financial benefits of incorporating ESG analysis, and regulations. However, as more companies market their ESG practices, it has become increasingly difficult to differentiate between managers from an ESG perspective.
Each company in a portfolio is unique and faces its own challenges related to its culture, business model, industry, supply chain structure and other factors. “So not only are there substantial differences between sectors but also differences between what is most material to individual companies within a single sector,” said Silverman.
To address the key areas of proxy voting and engagement, RisCura released a report entitled Moving the Needle: Stewardship in South Africa and a similar report on China, with important lessons flowing from each. “What we learned in these reports is that asset managers need to take a more holistic approach when evaluating and reporting ESG practices. This would involve looking at all the ‘pieces of the puzzle’, including a company or fund’s environmental and social performance, governance practices and overall impact on communities,” said Silverman.
Investors and asset owners need to demand that asset managers not only focus on disclosure, especially self-reported information, but also on robust engagement with corporate management. “Corporate management are past masters at ‘divide and conquer’ and the ability to obfuscate the issues – with matters of an ESG nature certainly no exception,” Silverman concluded.
ESG investing can bring positive change to the world, but investors must be cautious about greenwashing and take a holistic approach when evaluating ESG practices. Asset managers must engage with corporate management to drive positive change and demand a high standard of disclosure.
Download RisCura’s “Moving the Needle: Stewardship in South Africa” report now to gain insight into engagement and proxy voting practices and help drive real change as a responsible investor.