It Pays to Have a Healthy Dose of Skepticism
By Josh Bedell, CFP, CIMA and Sylvia Callan, CFA
As with any new investment trend, a rise in popularity can give way to bad actors.
ESG (environmental, social, and governance) investing is not immune. Recent articles from the Economist, Barron’s, and the Wall Street Journal focus on the rise of ESG investing, and the perhaps predictable attempt by some to capitalize on this trend in a disingenuous and unscrupulous manner.
However, they leave investors who are socially conscious without a way forward in seeking to decipher the good from the bad.
The need couldn’t be more pressing, with ESG investing slated to rival traditional forms of investing in the next several years. With this potential surge in demand, concerns have arisen about how seriously the ESG criteria are being considered.
“Some mutual funds and portfolio managers have taken to slapping an ESG title on a fund or portfolio without doing much of anything to truly incorporate ESG factors into the investment process. This practice of attempting to woo well-intentioned investors, while not actually striving for change, has even earned a sardonic title: ‘greenwashing.’”
Indeed, some mutual funds and portfolio managers have taken to slapping an ESG title on a fund or portfolio without doing much of anything to truly incorporate ESG factors into the investment process. This practice of attempting to woo well-intentioned investors, while not actually striving for change, has even earned a sardonic title: ‘greenwashing.’
The good news is that the SEC has taken notice, and has proposed some rules that would create consistent standards and disclosure requirements. In addition, the Principles for Responsible Investing (PRI), a globally recognized institution for sustainable investing, tracks the development of regulatory policies in sustainable finance that support ESG investment principles. Over the past year alone, the PRI identified more than 200 new or revised policy instruments that support, encourage, or require investors to consider long-term value drivers in ESG — the main elements of socially responsible investing.
Understanding the evolving landscape in ESG can feel like a daunting task, especially if you have many other things on your plate, like a job, family, and normal day-to-day responsibilities. The good news is, there are some relatively easy steps investors can take to ensure their portfolio aligns with their values.
For starters, mutual-fund families that focus exclusively on ESG and/or socially responsible investment (SRI) funds are more likely to utilize stringent criteria than a traditional fund family that has added one or two ESG funds in recent years. Further, actively managed funds, which incorporate at least some degree of qualitative analysis, tend to evaluate companies more thoroughly than index funds, which simply track a list of ‘approved’ holdings from a third party, though there are exceptions.
Investors without the time or inclination to do this research on their own can turn to a trusted asset manager who takes ESG investing seriously. Dedicated ESG portfolio managers do extensive work in the field, often talking to mutual-fund managers directly, visiting corporate offices, analyzing lists of underlying holdings, and obtaining advanced credentials related to ESG investing.
Ultimately, it pays to have a healthy dose of skepticism. It certainly helped our firm when we decided to offer an ESG strategy for our clients. It required an added layer of scrutiny to ensure that ESG investment principles were clearly defined, closely monitored, and reported in a timely manner.
It could be an encouraging sign that increasing numbers of investors are seeking to effect positive change while also generating competitive — or possibly even superior — returns. A shift of this magnitude is bound to encounter some hiccups along the way.
Far from a reason to abandon the initiative altogether, greenwashing concerns offer an opportunity to further investor engagement, advance regulatory reform, and promote endeavors to improve ESG reporting and investing standards with the potential to benefit us all.
Josh Bedell is a financial planner and investment advisor, and Sylvia Callan is a portfolio manager, for Gage-Wiley. Callan has earned the CFA Institute certificate in ESG investing and leads the firm’s ESG efforts. Securities offered through St. Germain Securities Inc., a FINRA member. Gage Wiley is a d/b/a of St. Germain Securities Inc.