According to research from the Independent Investment Management Initiative, 66% of ESG experts surveyed believe the practice of making unsubstantiated sustainability claims is a significant issue for the industry – less than 10% say greenwashing is not a major problem1.
Similarly, over three-quarters of investors believe it is prevalent in corporate reporting, according to a survey conducted by PwC – a large majority (87%) suspect that corporate disclosures contain some greenwashing2.
Suggestions of greenwashing have been enough to trigger sharp falls in some companies’ stock prices3. That’s why visibility on a company’s actual actions and metrics used to determine progress is essential. It means engaging management teams and boards, delving into the data, and demanding more transparency and true progress on sustainability.
Soliane Varlet, co-portfolio manager on the Mirova Global Sustainable Equity strategy, explains why engagement is the best way to help steer a company towards a more sustainable future.
Transparency, experience, background checks, and resources allocated to sustainability and company engagement. These all contribute to building up a picture of how serious you are about sustainable investing.
But it’s worth delving a little deeper too. Investors should look at the kinds of resources that are dedicated to ESG: how many analysts does the firm have, and how experienced are they?
We have a team of 18 sustainability research analysts both on the listed and non-listed side. That’s companies that are listed on the stock markets and those that are privately-owned.
And we share information on all these companies across the listed and non-listed spaces – importantly on their technologies – to create a virtuous circle of knowledge. Because analysts on the non-listed side are oftentimes working on companies with access to or even developing early-stage technologies that are not yet available on the listed side. They will therefore have a very good understanding of that nascent technology advantage and be aware of how this innovation could mature and arrive later in the process for the more mature listed companies. This allows us on the listed side a deeper understanding of the full ecosystem of environmental technologies and solutions and the potential real-world impact they may offer.
Investors should also check for transparency in the methodology of the investment manager and in the reporting. So, it’s about transparency, experience, background checks, and resources allocated to sustainability and company engagement. These all contribute to building up a picture of how serious you are about sustainable investing and should provide confidence to investors who are worried about greenwashing.
But we are all involved in the process of meeting the management teams at these companies, so we can help them to understand ESG criteria, and help them make the transition to more sustainable practices.
Is essential that our financial analysts meet the management teams, the people involved with day-to-day operations within the business. It’s the best way we’ve found to get good information on companies.
Our sustainability analysts also tend to meet sustainability specialists at the companies, as well as operational people. Sometimes, we also have dedicated engagement meetings which are led by the sustainability analysts. But the financial analysts and portfolio managers can also attend those meetings.
We do engagement on a company-by-company basis. Our sustainability research helps to define our engagement priorities, which we review every year. So it could be that diversity is going to be a key focus. Or it might be biodiversity. We engage with a company, asking the management teams for more data and transparency on that specific topic, so we can measure progress and track how that company is doing relative to its peers.
We also engage through investor coalitions. Take the metric for diversity, for example. When we launched our specific gender diversity funds, we formed a coalition with other asset managers and sent engagement letters to multiple global corporates.
The idea was to increase awareness more broadly because the more people look at gender as a criteria, the more companies will have to publish and be fully transparent. We want to be in a position where we have the data on these companies and can prove a strong correlation between diversity and economic performance, so we can then find ways to move ahead together as an industry.
We’ve come a long way but there’s plenty to be done to increase awareness among investors, clients and companies. We need more transparency, better quality data, more conviction.
Ultimately, we try to ignore the political noise and invest in those companies that we believe will enable us to reach the UN Sustainable Development Goals – the SDGs – and we want to avoid companies that will prevent us from reaching those goals.
For our Global Sustainable Equity strategy there are four distinct steps in our process. The first is to identify the long-term trends that will reshape our economy and the way we live over the next decade or so. We believe those companies that are well positioned to benefit from transitions will outperform the ones that aren’t. We focus on demographic, technological, environmental and governance-related transitions.
After identifying the companies that we believe offer solutions for those long-term transitions, and that are well positioned to benefit from them, we analyse investment opportunities in great detail, to make sure they have the right characteristics that we believe will create long-term value. These include: high barriers to entry, strong competitive advantages, a well-diversified and strong management team and a strong financial structure.
We also focus on the ESG characteristics of a company during this process. Not only do we want to avoid investing in companies that take irresponsible risks, we are also convinced that by having the right ESG characteristics, a company may be able to generate even better returns.
But the fact of the matter is that there are a lot of environmental-focused funds out there today. Most people understand the challenge of climate change and the importance of being aligned with the 2⁰C global warming scenario.
But the social challenges are perhaps less understood. We don't have as many social funds as we have environmental funds, largely because we don’t have the same level of transparency or access to data on these challenges yet. That's why it's important to raise awareness on the social challenges.
Today, only about half of the world's working age women are active in the labour force compared to more than three quarters of working age men4. Globally, women also earn over 20% less than men5.
So, you need to make things equal for men and for women. For example, you monitor the gender pay gap, as you do in the UK, and you monitor internal promotion rate. You have to ensure equal opportunities for men and women – that means you need to have gender equality policies that could also benefit men.
Take paternity leave for example. This would put women and men on an equal footing at work, which is great. But it would also allow dads to spend time with their young children. Other measures that allow both parents to work, such as employer subsidised childcare, can be very popular too.
There is also the question of performance. We have a lot of research showing the link between more diversity and better economic performance. And we’re not just talking about gender diversity, but all kinds of diversity – racial diversity, age diversity, social diversity.
It also gives you a better understanding of your clients. If you are a global company, you need a workforce that reflects the clients and customers you serve. All races, all ages, all geographies. And a more diverse, inclusive workplace means more opportunities for career development for all employees, whether they are younger or older; black or white.
Fundamentally, while it's not always easier to work with people that are different from you, it's always more innovative. If one company takes credible steps to improve board diversity and another doesn’t, the one that does will have a larger pool of human capital to draw from.
2 Source: https://www.pwc.com/gx/en/issues/esg/global-investor-survey-2022.html
3 Source: https://seekingalpha.com/news/3890731-enviva-plunges-after-blue-orca-short-report-dubs-latest-esg-farce
4 Source: World Bank, 2022, https://genderdata.worldbank.org/data-stories/flfp-data-story/
5 Source: International Labour Organisation, https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_856203/lang--en/index.htm
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