Tougher Accountability in ESG Investing

Fund managers should be subject to more rigorous standards to ensure their disclosures about ESG (Environmental, Social and Governance) investing are accurate.

Stoic Venture Capital Partner Geoff Waring said Australia should take the lead of the United States, European Union and United Kingdom by ramping up its scrutiny of ESG disclosure and compliance.

Investors are becoming increasingly ESG-aware and correspondingly more distrustful of greenwashing funds that claim to comply with ESG investing principles but in reality do not.

“Many investors are concerned about the hazy reporting of fund managers when it comes to their ESG investments,” Dr Waring said.

“There is a lack of consistency and regulation in how funds report ESG investments and how ESG principles are integrated into their investment decisions and strategy and the impact this has on their returns.”

Dr Waring said it was time the investor industry associations such as the Institutional Limited Partners Association stepped in to address the growing concerns of investors about the problem of greenwashing.

Rather than just educating participants about ESG standardised processes they should act as a centralised platform for independent ratings and benchmarks of fund managers’ ESG compliance. Cambridge Associates calculate benchmarks for financial returns so could do it for social impact too, he said.

It was also important given the ongoing growth in responsible investing which represents around 37 per cent of total $3.135 billion assets under management according to the Australian Bureau of Statistics. The responsible investment market grew 17 per cent in 2019 to $1.149 billion.

“Stronger, more consistent guidelines and more information sharing would reduce the risk of misleading marketing claims about ESG investing,” he said.

“It would also push investor ESG preferences more effectively through fund managers down to the individual investee companies where many key decisions are being made.”

Dr Waring said investors were turning to venture capital as an alternative to invest more responsibly as they woke up to the unsubstantiated claims of some public and private equity funds about ESG investing.

“Early stage venture capital is by nature socially responsible and can generate attractive returns. But it is important that investors select high performing venture capital managers,” he said.

“The higher performing firms are those that concentrate on innovative solutions to environmental and societal challenges such as addressing climate change by transforming carbon intensive industrial practices or treating large chronic public health concerns such as cardiovascular disease and diabetes.”

“Higher performing venture capital managers will also be more proactive in encouraging better ESG outcomes from their investee companies.”

“Investors can take comfort that both attractive returns and the greater good are possible.”

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