When it comes to responsible investing, institutional investors and larger funds can face inertia thanks to the sheer volume of demands and expectations. However, retail investors can avoid being sucked into “greenwashed” products that cater to the lowest ESG-aligned (environmental, social and governance) denominator by focusing on the impact of their investments, WHEB Asset Management’s Ted Franks recently told Nest Egg.
“There is this increasing use of this idea of impact, which is one step beyond ESG,” he said.
He said that while it’s tricky for larger investment products and firms to deliver responsible investment solutions, the ability for these groups to “get away with BS” is limited when faced with investors genuinely interested in impact, rather than ESG investments.
However, the semantics of the issue are where investors may stumble, Morgan Stanley’s head of wealth management research Nathan Lim recognised in a recent BetaShares briefing.
Mr Lim said the point he most wanted to get across to investors was the distinction between restrictive, ESG and impact investing.
He explained: “A lot of investors or market commentators use words like ethical or ESG or impact like they all mean the same thing… but I think it's very important from an education perspective that we all must be very careful with the words that we use to describe what we're doing.”
While restrictive screening, as the name suggests, screens out industries like tobacco, sugar or coal, ESG-aligned products monitor the environmental, supply-chain and ethics of their composite parts.
The next tier up on the responsible investing ladder is impact investing.
This means that the investments look beyond avoiding harm to actively seeking solutions to specific challenges like climate change, fossil fuel reliance or water scarcity.
Mr Franks gave the example of ESG-compliant Unilever which protects its supply chain, promotes transparency and monitors its environmental impact.
All of these are good things, but essentially Unilever makes ice-cream, so it’s a net neutral investment.
He argued that by beginning the search for ethical investments with the end impact, investors are much more likely to build a strategy more aligned with their responsible goals.
In conversation with the Responsible Investment Association of Australia, BT Financial Group’s head of customer governance and sustainability Emma Pringle said investors are increasingly expecting – rather than seeking – a baseline of responsible investment across every asset class.
“However, what we’re seeing, through our conversations with our customers and adviser network, is that confusion still exists about what is (and what isn’t) a responsible investment; what investors can expect from a sustainable or ethical fund, in terms of performance and also characteristics; and how to access responsible investment products,” Ms Pringle added.