Investments  

How will regulatory changes impact ESG?

This article is part of
A guide to ESG and responsible investing

"My hope is that the regulator will bring in universal definitions across the industry, thus forcing fund groups to make choices. It is also critical that fund houses are absolutely clear about what their offerings are and just as importantly, are not, and who their intended audience is.”

Being informed

Better education can also help individuals to have a better understanding of the terminology.

Benjamin Matthews, investment manager at Heartwood, says: “When it comes to definitions in the field of sustainable, responsible, ESG investing, clear regulation would of course improve the situation. However, broader education is also important.

"For example, asset managers and advisers could consider taking on the CFA ESG certificate – a fantastic tool for learning about different definitions and approaches. This course covers the spectrum of these types of investments, and discusses the varied investment profiles offered by the subtly different categorisations.”

Nicolo Bragazza, investment analyst, portfolio management at Morningstar Investment Management says a challenge with the definitions of ESG out there is that many funds and companies tend only to focus on the environment, or green, part of ESG and neglect the rest.    

He adds: “Recently a lot of attention has been devoted to environmental issues meaning many funds are applying environmental based screenings and exclusions. This is not a high enough threshold for proper ESG integration as it misses the “S” and “G” which are just as important as the “E”.

Frederic Samama, chief responsible investment officer at CPR Asset Management, highlights two examples he believes show how uncontrolled the present use of the term ESG is.

He says: “As an example, some mining companies have a very good ESG rating although generating some massive externalities. And Tesla that is helping shift the entire autocar manufacturing industry therefore has a massive impact on society sometimes has a very bad ESG rating.”

Sara Razmpa, head of responsible investing at Unigestion, says regulation will help the industry, as it would create more transparency about what everyone is doing.

Term limits 

Malcolm McPartlin, portfolio manager on the sustainability team at Aegon Asset Management says: “The traditional definition of impact investing is being stretched and in some instances misused.  Bold marketing claims can often lead investors to believe there is a 'magic green button'.

"However, ESG investing is rarely black and white, and time must be taken to understand and debate the nuances.”