Friday Highlight  

The investment sector needs an ESG standard

Determining whether a company in the aggregate is actually helping to improve the environment requires much more complex analyses – as well as having access to the relevant data – than investors realise, or, if one is being cynical, have been led to believe.

And then the S: social. What does that mean in the most basic sense? Does a company treat its employees well? Does it have a positive and respectful culture? Does it embrace a certain set of values? Is the workforce diverse and inclusive? Is the company contributing to societal gains?

Does it embrace a wider set of stakeholders, as the Business Roundtable and World Economic Forum have called for? The list goes on – with no easy or clearly definable answers.

Clearly, ESG investing is a long way from achieving what passive investing has accomplished: basic benchmarks, simple and clear information, standards, understandable terminology. This confuses investors, who increasingly want to know about the impact of their investments.

The soon-to-be published CFA Institute 2020 Investor Trust Study found that that while 19 per cent of institutional investors and 10 per cent of retail investors currently invest in products that incorporate ESG factors, 76 per cent of institutional investors and 69 per cent of retail investors have interest in ESG investing.

Institutional investors are more likely to consider ESG investing as a way to generate higher risk-adjusted returns, while retail investors mainly look to ESG characteristics to express their personal values.   

Cyrus Taraporevala, chief executive of State Street Global Advisors, asserted at the Financial Times’ Future of Asset Management summit in 2019 that one day a company’s ESG rating will be as important as its credit rating.

But now, for any investor seeking to both earn a return and to be a force for positive change, the investment choices are confusing and seemingly infinite -- and the metrics for judging impact are not well developed.

We at CFA Institute hope to do our part. As the global leader in standards for the investment management profession, we are in the process of developing an ESG investment product standard that will build a framework for investment managers to better communicate, and for clients to better understand, the nature and characteristics of ESG investment products.

We believe such a standard can protect against “greenwashing” in the same way our Global Investment Performance Standards protects against “cherry-picking” investment returns: that is, give investors standardized information for transparency and comparability so that clients can make more informed choices.

We seek to build a classification standard so that clients can easily identify products with similar features.

We want to build a common language around features, so that clients can understand what they are getting in a specific product and give them the ability to make comparisons between products.