The ESG movement is one of the more promising developments in recent history.
For the first time, a vast number of everyday Canadians are insisting that their money be invested in ways that do no harm and help improve world conditions.
Responsible investing dates from the 1970s. But in its current form, as a potentially powerful force to ensure enlightened conduct in environmental, social and governance practices, ESG is in its infancy.
Which means ESG has some birthing issues.
The expression “wild west” is often used to describe the burgeoning ESG market, because vendors of ESG products can brand anything they choose as a save-the-world investment.
In a strictly regulated financial industry, ESG stands out for its lack of regulation. There is no consensus on what constitutes a genuine ESG product. There is no agreed methodology for measuring an ESG product’s credentials.
Many, if not most, vendors of ESG products provide scant disclosure of their holdings. Vendors are selective in what they choose to disclose. And in their marketing materials they offer only vague platitudes rather than facts about what makes their holdings socially responsible.
“The current quality of ESG data isn’t fit for investment decision-making,” says John Streur, CEO of Washington, D.C.-based Calvert Research & Management, one of the largest ESG investors, with more than $43 billion in assets under management.
A similar complaint was issued in a February report by the powerful Madrid-based International Organization of Securities Commissions (OICU). OICU members, including the Canadian Securities Administrators (CSA), oversee about 95 per cent of the global securities market.
ESG vendors cherry-pick among the varied half-dozen or so leading ESG frameworks worldwide, picking the ones that most closely align with their portfolios.
That obviously puts the ESG investor in a tough spot in being assured of the ESG credentials of their investment.
It’s no easy thing to determine the financial soundness of an investment. But at least there are agreed-on rigorous accounting standards, backed by regulatory enforcement, to inform investors of the true financial status of the investment.
But there is no ESG counterpart to those financial safeguards.
To be clear, your ESG mutual fund investment is regulated as a mutual fund, and the same with a “green” bond. But the authenticity of ESG claims is determined entirely by the vendor.
That accounts for the preponderance of ESG funds whose holdings are practically identical to the top financial performers in the leading stock-market indexes and the portfolios of the most popular non-ESG mutual funds.
The common accusation of “greenwashing” is properly levelled against those funds. But it might be that almost all ESG products are to some extent greenwashed.
Mutual funds, the chief means by which everyday investors participate in ESG, are heavily weighted to financial services and Big Tech stocks.
Those sectors are perceived to have a smaller carbon footprint than manufacturers, mining and oil and gas firms, and transportation providers.
But you will search in vain in those funds’ portfolios for stocks of companies in alternative energy (the E in ESG), affordable housing (S) or companies that have a gender-balanced senior management team and board of directors (G). In such cases, which are the majority, your money is doing no harm but it’s also not doing as much good as you were likely led to believe.
Meanwhile, banks and other financial-services providers that are favourites with ESG portfolio managers lend to, and invest in, everything under the sun. For instance, Royal Bank of Canada is one of North America’s top 10 lenders to the oil and gas sector.
As to Big Tech, just about every ESG portfolio is studded with big stakes in the shares of Amazon.com Inc., Microsoft Corp., Facebook Inc., Alphabet Inc. (parent of Google Inc.) and their ilk.
Those ESG darlings boast above-average financial performance and a smaller-than-average carbon footprint.
But while they do comparatively well on the environment, as a group they are autocratic semi-monopolists that would score badly on social and governance metrics, if the was a regulator with the authority to call them out.
The social-media giants tolerate cesspools of hate on their platforms. And Amazon runs one of the world’s biggest sweatshops, with close to 1.2 million stressed-out underpaid employees.
If the point of ESG investing is to avoid complicity in income inequality, small businesses crushed by Leviathans, and the social-media poisoning of our democracies, ESG is a miserable failure.
But ESG is a noble concept. As a concept, it directs capital to responsible enterprises, rewarding them for their above-average corporate social responsibility. And it withholds those same rewards from bad actors, enabling everyday Canadian investors to tangibly improve the world.
That is not magical thinking. By withholding money from coal companies, investors have helped shutter a large portion of the North American coal industry. They have similarly depressed the value of publicly traded oil and gas companies worldwide, with the same goal of sharply reducing CO2 emissions.
But for the ESG concept to become a meaningful reality, it needs some rules of the road.
Those rules can’t come soon enough, because Canadians have already invested about $18 billion in the country’s 150 ESG mutual funds. That’s a near tripling over last year.
Fortunately, an ESG reform movement is underway.
The OICU, with the support of the CSA, is pushing for the creation of a new Sustainability Standards Board (SSB).
An SSB would supplant the several groups now providing inconsistent ESG guidance.
We can expect consistent ESG rules sooner than later. CPA Canada, the country’s chief accounting body, spoke for its counterparts abroad in expressing earlier this year its frustration over the crazy quilt of ESG standards and methodologies for measuring ESG performance.
And well-meaning vendors of ESG products blanch at the prospect of being accused of greenwashing for lack of uniform standards, which would drive away business.
For now, though, it’s almost entirely up to everyday investors to do the homework necessary to ensure that their ESG investments are the real thing.
One way to best assure that your ESG goals are being met is to buy shares in specialized ESG funds tailored to your specific interests — clean energy funds, gender and ethnic diversity funds, labour relations funds. These funds also tend to do a better job of disclosure.
A problem with generalized funds is that very few companies score high on all three of the E, S and G metrics.
In the meantime, there’s more than a little inspiration to be taken from so many Canadians wanting to do well by doing good with their investments. That is a historic first that will eventually pay off as intended.
Be well. Stay safe.