How does an institutional investor spot companies that are greenwashing, or faking their responsible investing credentials?
Asset owners that take environmental, social and governance (ESG) investing seriously say there are a few signals to detect.
“When I am looking at a company’s sustainability report, I’ve got a list of criteria. I want to see that sustainability is part of their business strategy discussion and if it has been assured and advised in some way," said Katie Beith, senior investment strategist, responsible investment at New Zealand Super.
She noted that this can take the form of measurable levels of transparency and governance, espeically in communications.
"Are there materiality matrices, where they’ve taken the time to ask stakeholders what the key issues are; taking a view on the impact of those and reporting on the most relevant ones?" she offered by way of example.
"I also want to see whether there are ‘work-ons’. It’s easy to produce a report that says all these amazing things, and nothing about the issues they are still to address, or where they’re a bit less advanced. If none of those are there, that’s a warning sign, because no one’s perfect and there is always something that needs working on.”
The responsible investments team of the sovereign wealth fund also looks for board accountability, checking who is in charge of sustainability.
“That is really important in making sure that sustainability goes to the heart of an organisation,” said Beith. “If you are using voting as a lever, to make your position felt, you can figure out who is responsible for sustainability reporting and you can make your point in that way too.”
NZ Super’s in-house listed equity team handle that on a daily basis for local companies, noted Beith. For the global portfolio, the fund relies on the passive managers it uses such as BlackRock, State Street and Northern Trust, all of which have considerable resources focused on engagement.
NZ Super also uses MSCI’s red flag system of performance standards and has engaged service provider Bank of Montreal since taking its voting management in-house last year.
There is an expectation that external managers will carry out their due diligence. Beith said, “when we look at new managers, we have some ESG due diligence questions, which change according to the different emphasis at the time. The latest one has quite a focus on climate, but they also include questions on voting and engagement. We also want to see their PRI responses.”
He observed that many of the new fund managers they’ve looked at recently are advanced on ESG analysis and tend to have quite big teams.
“This is a stark change from even three years ago. In the past, we often felt we were pulling managers along with us. Now it really feels like resources are being invested and teams are being built and budgets established.”
Another important consideration for asset owners when assessing external managers is that ESG staff should work with the investment team and not part of corporate strategy.
“Once they are part of the investment team, that’s where the rubber hits the road and we see it built into investment decisions,” said Beith.
EXTERNAL MANAGER EMPHASIS
However, a lot of onus for effective ESG investing still falls on the external fund managers that asset owners work with.
Felipe Gordillo, senior ESG analyst at BNP Paribas Asset Management told AsianInvestor that fund managers need to root out those companies that fake their ESG credentials. In order to do so, “they need to be having a dialogue with companies’ management, and possibly their board, regarding their commitment to relevant ESG issues in their industry and company; what are their plans; what are their quantitative targets; what are their actions?”
He added that fund managers must identify gaps between those dialogues and a company’s disclosure, seek explanations for those gaps and whether they are likely to persist because of management’s lack of commitment.
As for companies, one of their tough decisions is to work out whether it’s worth investing in good governance, says Jamie Allen, chief executive of the Asian Corporate Governance Association. "Judging by the compliance mentality (i.e., do the bare minimum) that most exhibit, their current answer would appear to be no,” he said.
Allen believes this ambivalence stems from the manner in which corporate governance enforcement has been managed in Asia over the past 20 years.
“Despite promoting the ‘comply or explain’ concept, regulators have given the impression that the key word is ‘comply’. If the system was truly working, we would be celebrating a diversity of company governance systems and excellent explanations. Instead, we have a governance monoculture where all listed companies look pretty much the same on the surface. No wonder the informational value of CG reporting is so limited for most investors.”
Until regulators pressurise companies to improve their governance, greenwashing will remain a problem for asset owners to navigate. It’s a lot easier and cheaper for companies to claim they are green than to embody it.
This story was adapted from a feature on asset owners and greenwashing, which originally appeared in the Spring 2019 edition of AsianInvestor.