Australian institutions' ESG policies evolve amid rising scepticism

The increased scepticism towards ESG as a broad concept is resulting in greater scrutiny of ESG funds by institutional investors.

For all the talk of a backlash against ESG in the US however, the negative effect on investor attitudes elsewhere has perhaps been overstated. 

There has always been a healthy scepticism applied to ESG-badged investments by asset owners, according to Alex Zaika, managing director, Australia at GAM Investments.  

“Australian institutional investors demand an integrated ESG approach throughout the investment process and will test it to make sure managers are not using pretty presentation slides without any real substance,” Zaika told AsianInvestor.

“Most know exactly what they are looking for and have enough experience to sniff out if something isn't quite right. The ESG teams also hold a lot of power and can veto investment decisions if a strategy doesn’t stack up.”

Marie Cardaci, deputy head of responsible investment at Australian asset consultant Frontier Advisors, confirmed that asset owner clients are placing greater scrutiny on fund managers’ responsible investment claims.

However, Frontier has not seen institutional investors pulling back from such funds, as long they can be convinced assets are genuinely managed in line with responsible objectives.

POLITICS IN THE MIX

“Positively, this greater scrutiny is leading to an uplift in the industry’s understanding of responsible investment principles and potential. Over time, we expect to see investors transition away from managers who cannot prove their activities are aligned with the client’s responsible investing objectives,” Cardaci told AsianInvestor.

Industry watchers point to the politicisation of ESG investment, particularly among pension funds, as being at the core of the backlash in the US. ESG became weaponised, with some states legislating against its adoption within an investment framework.

Anti-ESG campaigners have created a climate of uncertainty among investors increasingly unsure whether these thematic funds can deliver on their promise. According to Morningstar data, investors pulled more than $14 billion from US sustainable funds in the past year.

Zaika points out that in pure performance terms, it could be argued that ESG funds do create a drag.

“In terms of alpha, by design, ESG filters will screen out potential securities so the breadth of investment opportunity reduces, and with it the opportunity for ‘alpha’.  

“This is different to an impact strategy that will have a very specific mandate and won't employ simple negative screens. My feel is investors will move towards true impact strategies rather than the old ESG funds with basic filters.”

In the US and Europe, some fund managers have been removing words like "green" and "sustainable" from their product branding, according to analysis by research firm Broadridge.

This could be seen as a good thing if it means fund managers and fiduciaries are being forced take seriously their ESG responsibilities.

GREENWASHING CASES

Accusations of greenwashing now come with regulatory consequences in Australia. This year, the Australian Securities & Investments Commission (ASIC) has pursued several high-profile enforcement actions for perceived greenwashing.

Mercer Superannuation was fined for allegedly making misleading statements about the sustainable characteristics of some of its investment options.

This was followed by proceedings against Vanguard Australia, alleging misleading claims about certain ESG exclusionary screens that were applied to its investments.

ASIC has also lodged proceedings against an asset owner, Active Super, alleging ESG misrepresentations on its website and social media postings.

ASIC has indicated that future cases may move beyond misleading and deceptive conduct to include false net zero statements and abuse of terms such as “carbon neutral.”

Michael Wyrsch, chief investment officer at Vision Super told AsianInvestor the current scrutiny and negativity doesn’t have any impact on its approach to ESG.

“Superannuation funds more generally may be increasingly unsure whether ESG fund managers can deliver on their promises. Our approach has never been to rely on manager promises. We are more inclined to assess how much manager interests align with our own and on their capability to deliver. This isn’t any different from how we assess managers more generally,” said Wyrsch.

The crisis of confidence in ESG as a fund concept could be seen as a sign that the ESG industry is maturing, but Wyrsch isn’t so sure.

“There is no reason to believe a maturing of the responsible investor market will bring more sustained growth in the future. However, increasing real world impacts from climate change and the degradation of the natural world will continue to keep a focus on some areas of responsible investment.

“We would just note that it seems increasingly apparent that the current economic system and financial markets are incompatible with a sustainable economy and as such we expect significant changes over the next few decades."