As ESG investing is set to become a force to be reckoned with across the globe and region, firms and fund managers must ensure objective assessment of ESG performance and transparency with investors, Rasihla Kerai writes in a guest post for finews.asia.
By Rashila Kerai, Group Head of Sustainability, VP Bank
One of the bright spots amidst the ongoing COVID-19 crisis is Environmental, Social, and Governance (ESG) investing, which has emerged as an investment pillar for the wealth management sector. According to the Institute of International Finance, steady growth in sustainable finance was partly attributed to the outbreak – publicly-traded mutual funds invested based on ESG ratings during Q1 2020 increased by 30 percent from the total inflow in 2019.
The ongoing crisis has only highlighted the intensifying threat of environmental risks and inequality, bringing these problems to the forefront and catalyzing growth for green investments. According to the Economist Intelligence Unit, 68 percent of Asian investors intend to increase their allocations to sustainable finance over the next year, and 27 percent of survey respondents expect to have 25 percent to 50 percent of their AuM in sustainable investments in three years.
Women Gaining Access
This increased demand is also reflected in the rising interest in sustainable investing among high-net-worth individuals (HNWIs). These investors prefer shifting their capital towards impact investing – in contrast to philanthropy – as they can effectively recycle their returns for sustained societal impact.
With ESG high on the agenda for many, women have played an integral role as the driving force to this growing phenomenon. According to VP Bank’s Winning Women in Asia Pacific report female family members tend to gravitate towards sustainable investments that align well with their values. Our interactions with clients also suggest that the rising trend in ESG could be significantly bolstered due to women gaining access to and accruing more wealth.
Not Limited
Apart from women, the next generations are also primed to be more interested in ESG issues. A survey by Schroders found that the majority of millennials and Generation X already consider sustainability factors when selecting an investment product. The appetite for ESG investments is not limited to any singular group and will likely continue to thrive.
Despite sustainability taking a front seat in investing, some challenges remain in creating a more equitable society through finance. One key hurdle is the lack of standards for determining what is considered a sustainable investment. This has led to some companies overplaying their credentials in an attempt to gain public favor – a term coined as «greenwashing». In January, a wealth management firm was found investing $85 billion in coal, despite an executive notice issued the year before on sustainability measures.
Greenwashing Concerns
Many investors rely on third-party ESG ratings for their sustainable investing activities. However, there is no correlation between ratings from different data providers. VP Bank’s Best Paper Award 2020 was presented to a study titled «Aggregate Confusion: The Divergence of ESG Ratings», that analyzed this problem.
In fact, more than half of Asia’s institutional investors stated that the lack of agreed standards around ESG has given way to greenwashing concerns, hampering their ability to invest sustainably, according to another survey conducted by Schroders.
More Harmonization
Some trends will help with this dilemma. In an increasing number of jurisdictions, companies are required to disclose their sustainability performance. The EU Action Plan for sustainable finance is an ambitious program to mobilize capital towards a sustainable economy, embed sustainability into risk management, and promote transparency. Through a common taxonomy, the regulations aim to address the issue of greenwashing and provide comparability.
Additionally, there is cooperation and coordination amongst central banks and supervisory authorities through initiatives such as the Network for Greening Financial Systems and the International Platform on Sustainable Finance. While we may not end up with one definitive standard for good sustainable performance, we can expect more harmonization and alignment in the coming years.
Critical Information
To remain accountable and avoid «greenwashing» allegations, fund managers should prioritize transparency and describe their methodologies on how ESG factors are used in their investment decisions clearly. VP Bank has developed a Sustainability Score that uses various components to measure the sustainability level of investment. The score takes into account opportunities and risks from a sustainability perspective. It allows for a comparison between different financial products – such as stocks, bonds, or funds – and gives transparency at a portfolio level.
As ESG investing is set to become a force to be reckoned with across the globe and region, there is a clear opportunity for the industry to meet client needs and engage with them on this topic. Both firms and fund managers must ensure objective assessment of ESG performance and transparency with investors – providing them with critical information that allows for well-informed decision-making. Likewise, investors should continue to ask about the sustainability of their investments from wealth managers.
