No one wants to think that by investing for the future they are having a negative impact on the world. Growth must be a primary concern, but not at any cost.
As such, ethical investing has been evolving and increasing in popularity, as awareness of social and environmental issues have multiplied.
Most recently, we have seen this in action as firms divest Russian holdings in protest against the invasion of Ukraine, and we are seeing investors turn activist along environmental, social and governance lines – lobbying businesses they invest in to deliver what they see as change for good.
Mutuality is an example of an operating model that can support positive ESG outcomes, and provide an alternative option for investors.However, the exponential growth in financial companies upholding ESG values, and a proliferation of ESG-aligned products and services, poses a challenge for consumers in assessing and understanding companies’ claims in this space.
Players across the financial services sector are seeing their marketing come under scrutiny.
Recent high-profile cases have even involved companies being publicly admonished by the Advertising Standards Authority for failing to acknowledge activities that run contrary to ESG credentials they are otherwise promoting.
The Financial Conduct Authority is now consulting on how to reduce greenwashing in a bid to help build confidence in investment products that aim to be ‘sustainable’.
But, in the meantime, the ‘green’ landscape remains rather muddy and difficult to navigate for consumers.
Raison d’etre
As the FCA’s consultation acknowledges, imprecise, inconsistent labelling can cause confusion.
When it comes to ESG, there is also an underlying challenge the sector is working to tackle in establishing clarity – or potentially even frameworks – around what is and is not an ESG-aligned approach, and how outcomes are measured.
Each and every one of these is an important question that the industry, with the regulator, must tackle.
But beyond fund objectives and titles, there is also another way consumers can help understand the ESG focus of the businesses they invest in – their underlying operating model.
How businesses fundamentally operate can influence every one of the three ESG pillars – the E, S and G respectively.
Pressure to return value to shareholders can mean businesses feel a need to prioritise investments or activity in certain sectors or areas that may not deliver the greatest environmental or social benefits.
Meanwhile, certain governance structures can be convoluted and opaque – preventing investors from fully understanding how their money is being used, or where it is going.
Customers and consumers should be able to review these elements and factor them into their own assessments of how a company aligns with their personal ESG values.
When it comes to delivering against ESG, not all models are created equal.
All together
Mutuality is an example of an operating model that can support positive ESG outcomes, and provide an alternative option for investors.
Mutuals – organisations that are owned by their members – are often built on purpose-led principles, rather than pure profit.
Because members are also the owners, they engage in decision-making, contributing to the business’s activity so that its values closely reflect their own.
Without shareholders, it is the members’ interests that are served first and foremost.
And as owners, communication with members about the business’s strategy, plans and results is often a priority, naturally delivering greater transparency and engagement – one factor that can help investors better understand how their money is being used, and how the business itself operates.
Engaged and open
ESG is complex, and often personal. While there are shared principles of harm and benefit, what is important to one investor, may not be important to another.
Clear definitions and standards in how we invest with ESG will help consumers make more informed decisions.
As part of this, investors should be alive to how the operating principles of the businesses that they invest in align with their personal preferences – going beyond the core elements of the ‘G’ to look at their core purpose; their raison d’etre.
For those seeking clarity in mission, transparency in actions and unparalleled accountability, mutuals will be a natural home.
Dan Gamson is group sustainability manager of Wesleyan Group
