Avoiding greenwashing: how to get ESG investing right

Ken Bertsch, Executive Director at the Council of Institutional Investors explores how investors can look beyond the ESG hype to create real value

Insurance Investor Editorposted on Tuesday, March 31, 2020

Insurance Investor: Do you consider the increased popularity in ESG investments among institutional investors self-defeating?

Ken: No. This has been a positive development, but carries its own challenges and risks.

The world is complex and people need to be aware of what is referred to as “greenwashing”. ESG issues can be used to put a good polish on things.

In fact, Enron had cast itself as a pioneer on environmental and social performance, which was blatantly misleading.  It was an outright fraudulent operation.

There are a lot of wins out there for investors, who have pushed companies to focus on the long term.

"ESG issues can be used to put a good polish on things."

Recently, I heard a presentation from a Procter and Gamble executives on steps the company had taken in the U.S. and Europe to get people to use cold water for washing their clothes, which has a significant impact on the environment.

It has been good ecologically and good for the company.

But not all situations are wins all round. Sometimes, difficult choices must be made, and I believe that a board of directors should be guided by the “Northstar” of long-term shareholder value.

From the very beginning, CII has advocated for strong governance as being important for value.

We also advocate for strong disclosure, including on environmental and social matters, so that investors can make educated and informed decisions.

II: What do you think would be a reasonable balance for investors that want to invest in companies that are engaged in ESG policies without the risk of being put at the back of the queue?

Ken: I would be wary of companies with dual class stock structures, where the founder/CEO has control. For example, it has been hard for investors to push Facebook on some issues because it is under the control of its CEO.

It is important to be an engaged investor, including talking with management of portfolio companies and being conscientious about voting.

"I would be wary of companies with dual class stock structures, where the founder/CEO has control"

It is also critical to be willing to use tools such as shareholder proposals, which can be very useful in pushing a strong ESG agenda, which not only serves the shareholders, but also the broader community.

Many investors are exposed to broad-based indexes, and through them essentially are invested in the entire economy.

"You need to be engaged, active and smart about these complex issues."

It may be particularly incumbent on such investors, sometimes called “universal owners,” to be aware of where a particular portfolio company or group of portfolio companies are shirking costs or pushing costs onto others.

These are referred to as externalities, because a universal owner can lose, even if a given company’s portfolio is making money.

In essence, you need to be engaged, active and smart about these complex issues.

For more information about ESG investing, download the environmental, social and governance investing, North America report https://www.clearpathanalysis.com/reports/environmental-social-and-governance-investing-north-america-2020?startdownload=true

 

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