By Emily Church
Anyone in financial services who hasn’t been living under a rock for the past few years will no doubt have the buzzword du jour – sustainability – etched onto their minds. ESG and sustainable investing as a concept is seemingly everywhere at the moment, which can surely only be a good thing considering the urgency of the climate crisis. But when everyday investors start taking notice, you can be assured that a reckoning is on its way.
Independent financial information website Boring Money this month published their 4th annual report into Sustainable Investing, surveying the views and attitudes of 4000 UK adults, 1,500 active UK retail investors and 200 financial advisers. Whilst the general sentiments are encouraging (people want to do right by the planet and want their money to be put towards tackling climate change), the research revealed a worrying lack of confidence amongst 40% of investors when it came to accurately discerning which investment funds were ‘truly’ ethical or sustainable. The worry was even more pronounced amongst advisers, with 69% fearing reputational damage from recommending funds which are later accused of greenwashing.
And therein lies the crux of the problem. In an area as subjective as ESG, who decides what is ‘green,’ or ‘sustainable’ or ‘ethical’ and how on earth can it be quantified? The investment industry is no closer to a comprehensive and uniform taxonomy structure than it was 2 years ago when this discussion started to pick up steam (although The Green Technical Advisory Group (GTAG) has been established to provide independent advice to Government on implementing a UK taxonomy, so we are at least on the right road). At the moment what we have is a number of different voluntary frameworks that pick up some of the puzzle pieces, but don’t yet pull together the whole picture. This may be good enough for now, but with COP 26 around the corner, investor awareness will only increase in sophistication. As positive a development that may be, it will lead to difficult questions from investors who simply want to understand where their money is going and what it is achieving – ecologically as well as financially. After all, if an electric car manufacturer relies on lithium mining for its battery components, is it still a sustainable investment? Or when Shell (one of the biggest polluters on the planet) invests in renewable technology, does it miraculously become a sustainable business?
The asset management industry must be prepared with coherent answers when these questions eventually come or risk damaging its credibility before sustainable investing has even had the chance to fully assert itself. The asset managers who stand to win this debate will be the ones who take proactive steps to monitor and measure what they can right now, rather than wait for a regulator to force their hand. We have a once in a generation opportunity to convince everyone to pull in the same direction – we must not squander this momentum because we couldn’t decide which measuring jug to use.