Is $35-trn investment in sustainability delivering goods?
It’s an impressive number. But the bulk of money, $25 trillion, is in a strategy called ‘ESG integration,’ also known as ‘ESG consideration’
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Sustainable investment assets grew to $35.3 trillion globally last year amid mounting concerns about societal inequities and climate change. That's about $1 of every $3 managed globally seeking out a profit from environmental, social and governance (ESG) concerns, according to Global Sustainable Investment Alliance's report last month.
It's an impressive number. But the bulk of that money - some $25 trillion - is in a strategy called 'ESG integration,' also known as 'ESG consideration.' In theory, this means that managers are including ESG data in their financial models, according to GSIA. In practice, money managers may be "aware of" and "take into account" ESG factors when making investment decisions, said Rob Du Boff, an analyst at Bloomberg Intelligence. But they're not necessarily compelled to act on that information, he said.
Nicolette Boele, an executive for policy and standards for the Responsible Investment Association Australasia, agrees that ESG integration doesn't always translate into action. Unless it's paired with things like proxy voting and corporate engagement, that alone won't necessarily "deliver better sustainability outcomes for a better world," she said.
Many large fund managers are saying they're integrating ESG across their holdings in a bid to attract assets from pension plans and other investors amid the boom in sustainable investing. Since ESG lacks definitions, it can often mean different things to different people, said Lisa Sachs, who heads Columbia University's Center on Sustainable Investment. And because ESG integration is often conflated with other responsible investment strategies such as impact investing and negative and positive screening, it's helping to create a false impression that the world of money management is directing capital towards helping solve societal ills.
"The major risk is that finance is purporting to solve social and environmental problems through ESG and that there's no need for government action," Sachs said. "But we need rigorous policy to address the big issues."
Some regulators are trying. European sustainable investments shrank by $2 trillion between 2018 and 2020 as policymakers tightened the parameters for what can be considered a responsible investment, GSIA said. In March, the EU implemented a set of rules known collectively as the Sustainable Finance Disclosure Regulation, which require fund managers to classify and disclose the ESG features of their products. Those that promise to actively promote ESG goals have a higher bar to clear on transparency.
In Australia, the finance industry is relying on its own voluntary rules rather than regulators. The Responsible Investment Association Australasia has a certification program and a responsible investment-leaders scorecard that rely on publicly disclosed policies and reporting on processes to help reward responsible investing, according to Boele. "The requirement of this transparency is key to industry accountability," she said.
Sustainable finance in brief
• JPMorgan - the world's largest underwriter of green bonds - is putting the ESG label on derivatives.
• A quant firm adjusted its models for ESG and found some "crazy" pricing.
• Shareholders are calling on the world's top miner, BHP Group, to abandon its divestment plans in favour of better management.
• Bloomberg Opinion: Biden's child-care plan may wind up raising costs for parents.
• Bloomberg Opinion: A statewide "stability stipend" under consideration in New Mexico may be a proof of concept for universal basic income. (Bloomberg)
