Investing in a socially conscious way is known by many names – socially responsible investing, environment-social-governance (ESG) investing, sustainable investing, values-based investing. And just as there are myriad ways to call the style, or factor, or choice of investing in this manner, there are multiple ways to actually put your money towards these choices.
And investors are indeed putting money into the space. Morningstar’s data shows that in Canada, at the end of the second quarter, assets invested in sustainable funds and ETFs breached the $26 billion mark, a quarter-over-quarter growth rate of 22% and a year-over-year growth rate of 130%.
In a recent interview with Toronto-based BNN Bloomberg, Kunal Kapoor, the CEO of Morningstar explained how our firm approaches sustainable investing.
“There’s a lot of interest in sustainable investing, and for good reason, because people are really thinking about how their money works for them. The level of understanding of various sustainable investing terms is quite disparate at this stage. The terminology that most people understand is words like impact, thinking about how they could do something with their money to actually affect the outcomes that they care about. Just as we've been talking more and more about investing being goal-based, ESG investing helps people think about getting their money to work for them in a way that they achieve their goals in a way that also resonates with their values,” Kapoor said.
Watch Out for Greenwashing
Kapoor also addressed the issue of greenwashing. As Hortense Bioy, director of passive strategies and sustainability research for Morningstar explains, greenwashing is making unsubstantiated or misleading claims about the sustainability characteristics and benefits of an investment product. To her mind, there are two types of greenwashing, the first of which is intentional greenwashing, which is when asset managers over-claim and over-sell what they’re actually providing. The second often comes down to an expectations gap between investors and asset managers. Here, there is no real intention from the asset manager to over-state the green characteristics of a product, but the investor expects more – because there is no common definition of “green”, the investor has a certain idea of what green should look like- without realizing sometimes that it is not practical or in their best interest. Investors should be wary of greenwashing and should take steps to protect themselves and their investments.
“As with just about any form of advertising, you always have those players who spend time educating investors and doing things in a way that actually make sense for the investor. And then there are those who are going to jump on trends. I would say good old-fashioned rules apply to ESG investing just as they do to any other type of investing. As investors, you want to make sure you are putting your money with reputable firms with long-term horizons at low expenses,” Kapoor said.
Include > Exclude
Kapoor believes we need to evolve from a world where we think about investing as an exclusionary act to thinking about it as an inclusionary act. To explain, he asks investors to think back to what was then called socially responsible investing, or SRI.
“I think a lot of investors were turned off from (SRI), because it was all about exclusion, and felt very dissatisfying. The wonderful thing about ESG investing is that it is inclusionary. You can overweight your portfolio with ESG data to include the type of firms that are poised in your view for outperformance. Don’t get too hung up on the ESG terminology, because the approach is so broad, and the way you’re tied to your goals, and how you assess impact are what's really material,” Kapoor said.
Kapoor accepts that there is some variance in the methods and tools available to investors to measure ESG. He also asserts that investors still need to do their homework, as always.
“Historically, investors have started with a group of ideas, and then tried to whittle down the list that they go and perform some research on. ESG investing is no different, you're starting with an idea of the kinds of things you want to include in the portfolio, and then you screen to reduce the universe that you're looking at to just the ones that you want to go research. Use tools such as Sustainalytics data to go ahead and screen for the things that you care about most, and then start whittling your list,” he said.
Corporates Still Need to Catch Up
Finally, the reality is that companies are just getting used to reporting this data. “This is a perfect case where investors have glommed on to this data, they care about it, they're leading the way in terms of how it's being used. Some of the people who are uncomfortable with it, I think, are uncomfortable because they have not as yet been able to put the data forward in a way that I think reflects on their own ESG proposition in a favourable way to investors. So, do we need more consistency? Yes. But it should happen at a much, much higher level than where things are today,” Kapoor said.
You can watch the whole interview here.
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