ESG investing is expected to get a boost from policies and regulations being promised by the Biden administration, but with the evolution of the overall sustainable investing universe, investors and financial advisers will need to keep things in perspective and be patient.
A panel of ESG experts discussed the challenges and opportunities ahead for the fast-growing category during an InvestmentNews webinar Tuesday.
While optimistic about the new attention being paid to investment strategies dedicated to environmental, social and governance factors, Allyson McDonald, chief executive at Boston Common Asset Management, said that it's “too early to tell” if certain new disclosure requirements for companies will have a significant impact.
“This is very good news for us, and we’re excited about any requirement that calls for disclosure,” McDonald said. “We know it’s a risk to their businesses if companies don’t focus on climate.”
Erika Karp, chief impact officer at Pathstone, agreed that any new regulation being established in the early days of Joe Biden’s presidency “will take a while to see how it plays out.”
But like McDonald, Karp is optimistic because she believes the added attention will only benefit the ESG space.
“What’s critical is the communication that there is systemic financial risk related to climate and it should be in the regulations,” she said.
The webinar panelists, who included Amit Bouri, co-founder and CEO of the Global Impact Investing Network, acknowledged new challenges that come with the category having become wildly popular over the past few years.
“Impact and sustainable investing have become trendy,” said Bouri. “That means it will drive more innovation, but it also means there will be more people flooding the market and optimizing for speed.”
McDonald agreed that for the first time ever, “we don’t suffer from a lack of available product with which to make a diversified portfolio, but we do suffer from lack of clarity and definitions.”
“We could probably use some SEC oversight,” she added.
In terms of the financial services companies, McDonald said "these big banks have amazing levers to pull to create change and immense power structures to make real change instead of jumping out there and creating a new product."
McDonald, who described her company as “doing ESG before it was cool,” said the “explosion of data sets over the past few years” has resulted in roughly 600 different ESG frameworks available for investors and financial advisers.
“There’s plenty of data, but it’s how you use it,” she said. “And you have to be able to fill in where there are gaps.”
Karp added that the flood of data and general lack of cohesiveness regarding how ESG is measured and tracked are in some ways making it more challenging for investors and advisers. “The quality of data is not where we need it to be and we have a long way to go.”
One point that Karp takes issue with is any reference to ESG data being somehow “nonfinancial or extra financial.”
“That bugs me so much because it is financial, or it’s even pre-financial,” she said. “And it is flat out false that you have to give up performance to invest in ESG. If anything, there’s a bit of alpha associated with ESG investing.”
McDonald said the idea of ESG causing a drag on investment performance dates to some of the earlier strategies that focused mostly on negative screens that would avoid certain companies based on their low ESG scores. “Then you have a good opportunity to underperform the benchmark,” she said.
Underscoring the semantic challenges for the overall space, McDonald said some investors who remain more interested in “deep impact over financial returns are willing to accept concessionary returns.” This creates a misperception among investors new to ESG that ESG investing is inherently concessionary.
“That’s another thing that confuses people,” she said. “On the impact side, a lot of people will take concessionary returns because they’re more focused on the impact.”
According to the panelists, the industry is still several years from ESG analysis becoming so common that funds stop carrying the ESG label, but Karp is adamant that the industry is heading in that direction.
“There’s no such thing as ESG investing,” she said. “ESG analysis is a discipline, that’s it. It allows you to get more predictive insight with more information, and if you use that discipline you can do any kind of investing you want. Just remember that 75 years ago, public companies didn’t have to disclose their revenues. We’ve come a long way in terms of disclosure.”
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