ESG has become something of a buzzword amongst industry experts and professionals in the financial services, being employed across the industry to describe a variation of products and approaches, according to Architas, a global multi-manager investment firm.
This has generated confusion amongst investors as ESG has been subject to multiple interpretations which has led to ’unconscious biases’ that exist within industry bubbles, the firm says. This misinterpretation has produced inconsistencies in defining ESG and has undermined industry standards, which has prompted retail investors to change their investment behaviours, Architas warns. As such, there are calls to produce a universal definition of ESG to help codify and stabilise the industry.
Architas has recently conducted a study researching retail investor attitudes towards ESG. The study found that there is a difference in attitudes towards ESG priorities in the Asian market and Europe.
The research indicated that ESG language needs to become streamlined. Indeed, it was found that the term ‘ESG’ is recognised by only 22 per cent of investors in Europe and 36 per cent in Asia. To address these issues, the industry must improve ESG translation so that it becomes more digestible for retail markets, Architas says.
For example, the environment is often most prominent when considering ESG, and while ESG does encompass the environment, there are other factors which help funds ascertain ESG status, such as social responsibility and governance.
This means that funds which damage the environment can obtain an ESG status through good governance instead, which can be misleading for investors, the firm says. Further suggestions to refine ESG language include initiating conversations with investors about responsible investing and improving transparency in product labelling to avoid misinterpretation.
ESG should not be associated with ethical investing, Architas argues. This is because an investment is subject to an investors’ ethical viewpoint which are exclusive to the investor and do not run parallel with industry standards. So,, the key challenges for the industry involve codifying ethical practices which can be an arduous task due to the subjectivity involved in individual investments. This challenge is reinforced by investors who, out of 11 countries surveyed, confirmed that personal ethics should be considered in making an investment. In particular, there were wide ranging discrepancies over whether ESG funds should invest in oil and gas producers. Some stated that oil and gas companies should be considered in ESG funds due to their low-carbon ambitions, and investments in renewable technologies which will initiate an inevitable transition, while others vehemently disagreed.
ESG funds have developed a reputation for being more expensive and demanding higher fees that non-ESG funds. Fees are important as the primary driver for investing is to improve personal financial security and expensive fees take a cut out of investor earnings, the authors found.
Demographically, young investors are far keener to invest in ESG funds and strongly believe that an ESG fund would outperform a non-ESG fund of the same risk level. Indeed, across a demographically varied pool of investors, research found that 51 per cent of investors in Europe and a further 68 per cent of investors in Asia would consider paying more fees in order to invest in ESG funds.
Clearly there is a changing attitude amongst investors who are beginning to realise the potential value of ESG funds. Yet, a full transition is still to take place; tighter industry regulation and improved fund labelling is vital in securing this change according to Architas.