Investors considering portfolio allocations to environmental, social and governance (ESG) managed funds should exercise a degree of scepticism, according to an Australian firm specialising in sustainable investments.
Nanuk Asset Management head of distribution Dan Powell said the term has become overused and may serve as a catch-all for investment products linked to green practices and technologies, even if the connection is tenuous.
“We were up here a couple of years ago saying quite strongly that we thought ESG as an acronym should just be banned from the industry,” Powell noted.
“Our perspective on it has always been that it’s an extraordinarily unhelpful acronym because people use it to describe a series of discrete and quite different things. Unless you get to the heart of what it is you’re actually talking about, it’s just confusing.”
Additionally, he suggested misuse of the term by some wealth managers may have contributed to investor fatigue and led to instances of greenwashing in a landscape where a comprehensive standard for ESG investments has not been established.
“It’s no great surprise to us that you’ve seen a lot of problems emerge since then because there were a lot of players trying to capitalise on a business opportunity by putting products out to satiate demand for things to do with ‘ESG’,” he said.
Rather than relying on labels, he advised investors to dig deeper and conduct their own due diligence on the assets held within a portfolio.
“I’d encourage [investors] to think about what it is they think is ESG. Is it avoidance of a particular industry? Is it explicit exposure to particular industries? Is it to be low carbon? Is it something to do with using the position as a shareholder to influence outcomes through stewardship activities? Because they’re all different things,” he noted.
“As a starting point, you’ve got to be very clear about which of those things you’re interested in. And once you are, then you should be able to narrow down where the managers are providing those particular things for you.
“Just because a fund says it’s an ESG fund, doesn’t mean it’s going to be doing any one of those things. And the easiest way to do that is just to look at the portfolio because where there have been problems, in most instances it’s fairly blatant.
“For example, oil and gas stocks in the top 10 of a fund that’s called an ESG climate fund. If you go through the portfolio holdings, you’ve got a pretty good chance of picking that stuff out.”
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