The upside of ESG backlash

Once championed as the future of investing, environmental, social and governance (ESG) is now under fire. 

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“In the last several months, we have seen an increase in the backlash against ESG, both in the media and from regulators and governments around the world,” said Aaron White, vice-president of sustainable investments with CIBC Asset Management. 

In the U.S. in particular, White said more than 30 states have introduced some form of anti-ESG legislation aimed at targeting ESG and how it’s used by institutional investors. Regulators are also becoming increasingly sensitive to the threat of greenwashing as they move toward mandatory, standardized climate disclosures.

Against this backlash, White said the industry needs to get “back to basics,” redefine what ESG is and understand how investors value non-financial factors in their assessment of companies. 

By recognizing that ESG is ultimately intended to help investors make better financial decisions that align with their values, White said the industry can counter the perception that ESG is solely about effecting change regardless of the financial implications. 

While some U.S. states target ESG, other jurisdictions are moving the other way, recognizing the benefit to stakeholders of considering all factors within the investment process, he said. 

Moves like this not only acknowledge that climate remains a real investment risk, but that the largest asset managers play an important role in facilitating the climate transition, understanding that it will benefit both their investors and the world, White said. 

Regulators are also beginning to scrutinize sustainability claims, with many declaring they will increase enforcement regarding greenwashing. According to White, until now, regulators have focused on investment managers making unsubstantiated claims.

Moving forward, regulators will be looking for transparency on ESG objectives and the processes managers employ, he said, with more explicit guidelines coming to Canada in 2023 to help managers understand their regulatory responsibility even further. 

In the meantime, White said advisors need to prioritize understanding their clients’ objectives, especially when it comes to non-financial factors such as ESG. He recommends redefining the KYC process using guidelines from the Investment Industry Regulatory Organization of Canada.

“It’s really important to understand the methodology of the investment solution that you’re offering to meet these objectives and to be able to clearly communicate and report to clients on this,” he said. 

Investors, on the other hand, can look to advisors to understand how managers disclose their approach to ESG and the processes they employ. Ultimately, White said investors should seek managers who are transparent about the solutions they offer and how they deliver on the stated outcomes.

Overall, White said ESG is intended to identify risks and opportunities, but it has been co-opted as a marketing tool. However, he said as the market evolves, investors will receive increased transparency and ultimately be able to make more informed decisions. 

“The backlash will inevitably be good for ESG as the increased scrutiny creates better alignment on the stated outcomes and objectives of how we invest,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.