Opinion: don’t miss golden chance for international ESG standards
IFLR is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Opinion: don’t miss golden chance for international ESG standards


More data and research are needed to evidence if ESG strategies outperform, and greater company and fund disclosures are needed to lessen greenwashing risks

Climate change is a global problem that demands global answers. As such, world leaders must build on the opening presented now, with the US re-joining the worldwide conversation under president Joe Biden, which was largely abandoned under the previous presidential administration.

The chance for international union with leading economies, particularly China, could level-set several problem areas critical to addressing climate change. Global standards are vital in a number of areas to tackle climate risks internationally, from rising sea levels, desertification of fertile land and more severe damaging storms.         

See also: ESG and the financial costs of climate change

Among the thorniest issues are the market-based, financial tools watered and grown to tackle climate change, beginning with uniform, international standards.

This level-setting for international standards goes beyond what environmental, social and governance (ESG) funds investors are filling with monies. But so-called ‘green’ or sustainable investments that claim to pursue environmental goals must be scrutinised.  

The Biden administration, admirably, has already taken steps to tackle several climate change issues. Earlier this year, the president issued an executive order to require federal agencies to understand potential impacts of climate change on public and private institutions and assets.

Governments around the world are dealing with the numerous voluntary standards that currently exist while continuing to implement climate risk disclosure requirements. Biden should build on the White House order by pushing for harmonised, global standards under which company climate risk disclosures would be reported. 

Funds foibles

Read any financial publication, asset manager website or myriad, new ESG vendor reporting or measurement tools, and it’s obvious the market is supplying for this sustainable investing demand. ESG strategies claim to provide returns that offer ability to “do well while also doing good,” a clarion call for the virtues, and, benefits of investing in ESG strategies.    

Alongside greater company climate risk disclosures, funds must more closely align to clear ESG metrics so investors must know more about what they are buying. Greenwashing risks for funds  ̶  investments veiled as adhering to ESG metrics that indeed are misleading  ̶  remain. Clearer, standard metrics for funds and how these investments measure ESG impacts are needed.

See also: US regulatory agenda to address private funds and ESG growth

Further research into whether ESG funds provide greater returns than counterparts over the long-term during in times of uncertainty and market stress is absolutely necessary. Proponents of greater ESG options point to research, particularly on millennials, that finds this generation is keen to invest in funds and causes for which they are passionate. That’s great, but investors with this long a time horizon need to take every advantage of their human capital, and need greater transparency into what they are buying to meet financial goals    

Some research claims to find that ESG strategies do provide better returns, fuelling the general perception that, in fact, ESG funds do provide outperformance over several years, and exceeded other options during the Covid-19 pandemic.

For example, a recent NYU Stern school of busines study found that a majority of 200 studies conducted since 2015 found that ESG increased returns. Studies like these have fuelled ESG investing interest, contributing to massive flows into sustainable investments. 

But, not so fast, the jury may still be out on whether ESG investments really provide greater returns. An April reportfrom Scientific Beta found no evidence that ESG strategies outperform others.  

Instead, researchers found that “sector biases and exposures to equity style factors capture the returns of ESG strategies”.

“In addition, the analysis suggests that returns are inflated when investor attention to ESG rises.”

This isn’t to say that ESG funds don’t have value, far from it. Rather, authors wrote that the findings don’t question whether ESG strategies can offer substantial value to investors. “Instead, they suggest that investors who look for added value through outperformance are looking in the wrong place.”

See also: Bankers urge for regulation to make capital markets more sustainable

Maybe when something seems like it could be too good to be true, it is. Investors may not like having to make these hard choices, and it’s likely not a zero-sum choice between supporting ones ideals or achieving returns that emulate or excel the broader market but investing, like almost anything else, is a matter of hard choices and balancing risk.    

For certain  ̶  to paraphrase Kermit the frog  ̶  it isn’t easy being green. But, for ESG product providers that’s what they signed up for. Great claims, such as ESG strategies outperform demand clear evidence. Otherwise, we’re left spinning our wheels and never getting the clearest picture possible.  




Gift this article