ESG Investing  

‘Misguidance not misselling is biggest industry ESG issue’

‘Misguidance not misselling is biggest industry ESG issue’

One of the biggest issues the asset management industry has around ESG is the interchangeability of language used, and how that is interpreted by clients, an expert has said.

Steve Kenny, chief distribution officer at Square Mile, said there is a big risk of problems being caused with investors due to the range of language used without proper clarity.

“Clients are informed using language that the recipients receives in a different way,” he said.

“The language used in [the green investing] space is seen to be interchangeable, and therefore not surprisingly the recipients of that language are interpreting it in different ways."

Common terms used include sustainable, responsible and ethical investing, and ESG, all of which have slightly different meanings.

While ethical investing means the avoidance of controversial industries, responsible investing is similar, but has an element of engagement - so fund managers may use their holdings to encourage companies along a more sustainable route.

ESG is the broadest term, encompassing environmental, social and governance aims, though the effectiveness of this investing has been criticised in recent months.

There is also impact investing, where investors choose to own companies that have positive impacts on areas of their choice, for example net-zero transition infrastructure.

Focus on true economics of ESG

Kenny said the asset management industry has made “too much of a play about the do good aspect” of green investing, and needs to go back to the true economics of it.

“The fact is, the amount of money that is going to have to be spent on changing the economy to transform it into net zero is off the scale.

“Therefore, if you are looking for economic returns, you want to be looking into this space, because the companies that are going to lead the change are going to be massive.”

The industry needs to highlight these opportunities, rather than push the “feel good” factor of ESG investing, he said.

Kenny’s comments came as Square Mile released a report on how asset managers are embracing responsible investment across their businesses and investment strategies, and how this will shape the future of their offering.

The survey of 59 fund groups conducted in the first and second quarters of this year showed between October 2019 and May 2022 there was a marked increase in how deeply ESG considerations are integrated at a firm level.

In 2019, 58 per cent of companies scored a two or above (three is the best), rising to 68 per cent in May this year.

There has also been a 77 per cent decrease in funds scoring the lowest mark, zero, in the period.

The research also showed that over the next one to three years companies will have made significant progress on their “responsible investment journey”.

UK asset managers are progressing on their responsible investment plans

Source: Square Mile

Kenny highlighted the importance of regulatory guidance when it comes to ESG investing.

“You need real regulatory direction to cause the type of change we’re seeing.”