Asset managers need to ‘speak green’ in 2019
‘Responsible’, ‘sustainable’ and ‘impact’ have become the major buzzwords in the asset management industry this year. As institutional investors become increasingly mindful of the need to match returns with social and environmental responsibilities, asset managers are adapting their strategies accordingly to keep up with demand.
This means more than just avoiding harmful companies but also investing in those that are making a positive impact on the world we live in.
Given the weight of this issue, its unsurprising that a raft of ‘green’ terminology has come into circulation to refer to ESG investing. The problem with this is that it is driving a lot of confusion about the individual meaning attached to each of the relevant terms. As they are all linked to ESG factors, they tend to get bundled together under the same umbrella, which further adds to the confusion.
The lack of a standardised, workable, industry definition for what exactly constitutes a ‘green’ fund or strategy has only exacerbated the issue. A ‘light green strategy’ to one house could be a deeper shade of green to another and herein lies the problem.
Given how muddled the language of ESG investing has become, many organisations are reluctant to admit they still don’t understand what it means to be green and how to communicate their offering to investors using the appropriate language.
The meaning of green
The PRI (Principles for Responsible Investment) define responsible investing as ‘an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns’. In short, ‘responsible investing’ constitutes the primary term for all investing based on ESG factors.
A slightly more common but increasingly outdated term is ‘ethical investing’ which refers specifically to a style of investing that reflects the ethical decision-making process of an individual or organisation. For example, it generally speaks to the exclusion (negative screening) of companies who produce weapons, tobacco, oil, alcohol or other potentially harmful products and services.
‘Sustainable’ investing is best understood in the context of the United Nations Sustainable Development Goals (SDGs). Introduced in September 2015, the 17 SDGs have ‘sharpened the focus on the non-financial impact of investments and aim to end poverty, protect the planet and ensure prosperity for all in a more sustainable and better planet.’
‘Impact’ investing can also be applied in the context of the SDG’s, but the phrase is more suited to describing a proactive approach to responsible investing. This means not only avoiding companies who manufacture/offer potentially harmful products and services but also actively investing in companies with the capacity to deliver positive change. For example, investing in companies who provide clean water to communities in third world countries or sustainably sourced consumable goods.
There are several financial benefits for investors who focus on impact, not only in terms of enhancing returns but also reducing risk. For example, investing in companies with lower CO2 emissions or water consumption could lead to lower cost structures, better margins, and higher profitability, and these improvements should have a positive impact on a company’s valuation.
The green marketplace is becoming crowded and asset managers vying for the attentions of institutional investors need to be extremely careful in their use of language. It is difficult to become an ESG market leader without a careful narrative in place to explain, in the greenest of terms, why your offering is better than the rest.
It is easy to see how these terms can be confused; given they are all united by the same principles under the umbrella of responsible investing. However, it is important to recognise these subtle differences and ensure they are factored into content development for ESG PR campaigns.
Consider the application of the various terms in the context of your investment strategy; for example, mentioning ‘impact’ if you are referring to a proactive style of responsible investing which goes one step further than the blanket screening approach adopted by many.
Above all, choose your green vocabulary wisely- it has the power to get your story heard and put you a cut above the rest.