Fund managers call on industry to address ESG confusion

More investors are choosing to invest sustainably, but concerns persist over whether environmental, social and governance (ESG) funds are actually having a positive impact or simply boosting sales.

“We’re hearing from investors and advisors loud and clear: there is a lot of jargon,” said Fate Saghir, head of sustainable investing at Toronto-based Mackenzie Investments.

Speaking at a panel at the Investment Funds Institute of Canada’s (IFIC) virtual annual conference on Wednesday, Saghir said the onus is on regulators to create a framework for how firms and asset managers can promote ESG funds moving forward.

“How do we ensure that we are all telling a consistent story, staying true to the values, but nevertheless not creating as much confusion as we have done today?” Saghir said.

Jon Hale, global head of sustainability research with Chicago-based Morningstar Inc., said jargon is a problem for regulators, too, noting that they don’t have any “special insight” into it either.

Part of the confusion, he said, is that there isn’t one distinct approach to sustainable investing.

“Clarity of terms, as well as transparency about exactly what approaches are being used, are going to be really key to helping investors better understand sustainable investing funds,” said Hale. “This would, in turn, narrow the expectations gap that I think a lot of investors may have of their funds.”

Morningstar developed a sustainable investing framework that lays out six approaches for addressing sustainability concerns: applying exclusions, limiting ESG risk, seeking ESG opportunities, practising active ownership, targeting sustainability themes or assessing impact.

At the “heart of greenwashing complaints,” Hale said, is a “mismatch between investor and advisor perceptions of what a sustainable fund should be about and the actual approach taken.”

To further address investors’ expectation gap, he said it might be beneficial to apply additional standards or disclosures for sustainable or ESG funds.

The CFA Institute is developing voluntary disclosures for fund companies. The disclosures aren’t meant to be a labelling standard and don’t require funds to meet certain thresholds to be considered ESG, sustainable, responsible or impact — which is a shortcoming, according to IFIC in its submission to the CFA’s consultation. IFIC said that without labelling rules and minimum standards for ESG product features, “the standards could facilitate rather than mitigate ‘greenwashing.’”

Sean Hagerty, managing director for Europe with Pennsylvania-based Vanguard Group Inc., said to simplify ESG investing, he breaks it into three main buckets: own and engage, allocate or exclude.

However, Hagerty said it’s important for everyone, and especially those in the asset management industry, to approach ESG investing with a bit of humility.

“It’s an area that has been around for a while, but it still feels pretty new,” said Hagerty. “I think there is still a lot of ground to cover until we as an industry feel really good about what we’re saying and how we are talking to investors, and constructing portfolios and managing the different dynamics of return.”

Frederick Pinto, SVP and head of asset management with Aviso Wealth, who was moderating the panel discussion, said it’s important for the asset management industry in Canada to understand the role it wants to play moving forward.

Against the backdrop of a global pandemic, a stark warning about the trajectory of climate change, and a renewed focus on issues of diversity, equity and inclusion, ESG issues have moved to the forefront of investor concern, Pinto said.

Global assets under management in sustainable funds reached over $40 trillion in 2020, Pinto said. According to Morningstar, investments in sustainable funds grew more than 50% in Canada last year.

“Clearly, we are at a critical tipping point for ESG,” said Pinto.