In today’s world of strict financial regulation and control, only small vestiges of limited oversight akin to the ‚Wild West‘ days of finance remain. Most would be surprised to hear that a strongly ethically oriented industry such as sustainable and responsible investment (SRI), which aims to incorporate non-financial i.e. environmental, social and governance (ESG) information, into the decision and investment making process, can be counted as one of these ‚lawless‘ fields.
While farmers get scrutinised and audited to achieve the EU „bio“ label for their produce, I could set up an investment vehicle tomorrow and market it to you as the „Caring Green Future Fund“ with a lot of trees and smiling faces on my website without much trouble; none of these claims are legally protected expressions nor does their use come with requirements or other strings attached.
This is not for lack of interest from the public; over the past decade, especially after the financial crisis as well as various scandals, there has been growing awareness for environmental and social issues, and as a result the growth in SRI has steepened significantly. In Europe alone the amount of funds invested in SRI strategies increased from $6.93 trillion in 2012 to $12.04 trillion in 2016, a 73% increase according to the GSIA Global Sustainable Investment Review (2016).
And yet there is little coordination on reporting, and attempts at sustainable investment screening remain lacklustre. Most of the DAX 30 companies report on metrics, however there is no set ESG reporting standard being followed. In 2013 the Deutsche Börse AG provided a platform where companies can report on sustainable action according to a provided guideline, however this is non-mandatory for any company listed on the German stock exchange. Too complex to enforce? South Africa proves this wrong, where the Johannesburg Stock Exchange has made it mandatory for companies to report according to the King Code on Corporate Governance, part of which is an integrated reporting on ESG metrics.
On the funds side the vast majority resort to simple negative screening, which describes the exclusion of ‚unsustainable‘ industries such as oil & gas or defence, without looking much deeper. Doesn’t sound too bad? Consider a ‚green‘ firm digging into bedrock and polluting a village’s ground water to put up a wind farm, and then consider an engineering firm working to improve the efficiency of gas turbines and their reliance on rare materials. Which one is more sustainable? The world is not black and white, and using superficial black and white screening methods to decide which companies deserve support is antiquated at best and negligent at worst. A growing number of academically sound screening criteria based on the interplay of financial and ESG metrics are emerging and their utilisation should be compulsory for firms and funds wanting to market themselves as sustainable. Change is needed to modernise the legislation holding firms and investment companies accountable and transparent in their approach.
Source: http://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf
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