Ethical investment tide lifts ‘greenwash’ concerns
SYDNEY (Reuters) – Investors are plowing ever more into ethical funds to back their views on issues such as global warming and gender equality. But such investments can be confusingly similar to standard funds, except for higher fees and “green halo” marketing.
The $23 trillion “sustainable, responsible and impact” (SRI) investment sector has received a rush of money since the Paris climate agreement and, more recently, in protest against US President Donald Trump’s plans to slash environmental regulations.
Europe is the dominant region for such investments, with $12.04t., followed by the United States, with $8.72t., while Asia lags behind.
US investors have poured $1.8b. into actively managed US equity funds in the socially responsible category from November to January, according to Lipper data, while other funds saw a net outflow of $133b.
Even in fossil-fuel-rich Australia and New Zealand, SRI investment rose from $148b. to $516b. between 2014 and 2016, and in oil-rich Canada, it increased from $729b. to $1.09t., according to the Global Sustainable Investment Review released last week.
Gavin Goodhand, a portfolio manager at Sydney-based Altius Asset Management, said the company’s “sustainable” bond fund tripled shortly after the 2015 climate accord, where nearly 200 countries signed up to measures designed to curb greenhouse-gas emissions.
“The Paris conference was the line in the sand for many of our retail customers, particularly the millennial generation, who want to do the right thing for the environment,” he said.
GREENWASH MARKETING
Governments are also tapping the trend, selling “green bonds” to fund projects such as wind farms or low-carbon transportation, with Poland, France and Nigeria making their debut this year.
However, some managers are skeptical.
“While environmental, social and governance factors should always factor into investment decisions, this is largely a marketing exercise,” said Steve Goldman, a global portfolio manager at Sydney-based Kapstream Capital, which has A$10b. ($7.6b.) of fixed-income assets.
Kapstream did not have a “responsible” investment fund because its clients had not asked for it, he said.
The bond market does not have commonly agreed upon standards or criteria for what constitutes a green bond, and there is no guarantee the proceeds actually go to the low-carbon project as claimed.
There are similar concerns about equity products.
Stuart Palmer, head of ethics research at Australian Ethical Investment, said there was a danger that some marketing departments would “greenwash” their products to lure investors into funds that are little different than standard products.
“The concern is: Do they represent real change, or are they a marketing exercise?” he said.
FEE PREMIUM
There are no agreed upon definitions about what is considered ethical, sustainable and socially responsible, but ethical investors are typically expected to cough up higher fees.
For example, retail investors pay more than a third higher fees for the sustainability and ethical funds at Sydney-based BT Investment Management (BTIM) than for its standard share-fund equivalent.
The three funds hold six or seven of their top-weighted stocks in common, including major banks Australia and New Zealand Banking Group, Westpac Banking Corp., National Australia Bank and miner BHP Billiton, according to December filings.
For investors, it can be a minefield.
“I find it difficult as a consumer to do the due diligence I would like to do, because even the ethical funds are not always totally transparent about what they define as ethical,” said retail investor Meraiah Foley, a Sydney academic. “One of the ethical funds I have invests very heavily in retail banks in Australia, and those banks themselves may be underwriting projects that the fund itself would not invest in.”
Individual stock picks can prove controversial.
Australian fund manager Perennial Investment Partners had a long position in building company James Hardie in its socially responsive trust before the fund was sold in 2015, despite huge liabilities stemming from Hardie’s history of manufacturing asbestos products.
An early Australian adopter of SRI principles, the A$10b. Local Government Super (LGS), holds a position in retailer Woolworths, the country’s biggest slot-machine operator, which would put it beyond the pale for investors who avoid stocks that profit from gambling.
LGS head of sustainability Bill Hartnett said Woolworths met the manager’s SRI guidelines.
“If Woolworths had more than 10 percent of their revenue in gambling, we would get rid of them,” he said. “We are true to label, but it’s under 10 percent.”
There is also no standard practice on what to do when an existing fund stock breaches a manager’s policies. Some investment managers will sell, but others argue they can influence behavior by retaining their shareholding.
“We believe in engagement rather than divestment,” said Sam Sicilia, chief financial officer at the A$22b. pension fund Hostplus. “When you sell a share in a ‘bad’ company, it’s a transfer of ownership and does nothing to the company that’s causing the issue, so divestment does not really work.”
‘While environmental, social and governance factors should always factor into investment decisions, this is largely a marketing exercise’