Banks and regulators 'learning on the fly' about ESG amid investor frenzy

·4 min read
A Stop HS2 campaigner takes part in outreach activities on the occasion of a HS2 Routewide Roadshow at Kings Cross Square on 5th August 2021 in London, United Kingdom. There have been increasing doubts regarding the viability of the northern section of the HS2 high-speed rail link since a recent report published by the Infrastructure and Projects Authority gave Phase 2b the lowest 'red' rating, indicating that successful delivery of the scheme appears to be unachievable. (photo by Mark Kerrison/In Pictures via Getty Images)
The rise of ESG investing has put pressure on companies to spell out how their activities impact the planet. (Mark Kerrison/In Pictures via Getty Images)

Demand for environmental, social and governance-focused (ESG) investments continues to surge as regulators struggle to stamp out "greenwashing" and toughen standards on the fast-moving sector. That was the message from a panel of bankers and industry experts hosted by the Canadian Securities Administrators (CSA) on Monday.

From the largest institutional money managers to retail investors picking stocks on their smartphones, the ESG theme has surged in popularity in recent years. Companies are now under increasing pressure to spell out how their activities impact the planet, as well as their approach to issues like diversity and mental health in the workplace.

Global ESG assets are on track to exceed US$53 trillion by 2025, according to Bloomberg Intelligence. A recent Yahoo Finance-Harris Poll survey found that 77 per cent of respondents who were familiar with the concept consider ESG ratings when making investment decisions.

The speed at which investors have prioritized non-traditional metrics has the financial industry and its regulators "essentially learning on the fly," according to Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada).

"The real problem is that the investor demand is outstripping the industry's knowledge and regulators' responses at this point," he said at the virtually-held event. "Time is of the essence in terms of regulatory and industry response to these kinds of issues."

He points to the U.S. Securities and Exchange Commission's recent probe into the standards money managers are using to classify ESG investments as a sign of urgency.

Representatives from the Ontario Securities Commission (OSC), Quebec's Autorité des marchés financiers (AMF), Royal Bank (RY.TO), National Bank (NA.TO), and BlackRock (BLK) participated in Monday's discussion, as well as the vice-president of ESG services from Toronto-based NEI Investments, which specializes in responsible investment products."

AMF superintendent Hugo Lacroix spoke about how regulators are monitoring acts of both deliberate and unintentional misinformation about the ESG credentials of investments.

"Not surprisingly in the past few years, we have seen the launch of several new funds picking up on retail investors' growing interest in ESG products," he said. "Some of these funds have tried to add reference to ESG in their name without referencing ESG in their investment objective at all. They have quickly realized that this triggers regulator scrutiny."

Lacroix says a review of the marketing and disclosure materials from investment funds by CSA staff found the current requirements are "broad enough in scope to effectively address ESG funds," but would benefit from more detail related to investment strategies and proxy voting disclosure.

Melanie Adams, vice-president and head of corporate governance and responsible investment at RBC Global Asset Management, noted that in the past year, the bank has started including its rationale for proxy vote decisions alongside its voting record. The move is meant to improve transparency for investors who may be evaluating RBC's funds based on the bank's support for shareholder-led ESG activism.

Adams says the explanation provides context when the bank doesn't throw its weight behind such efforts.

"We might agree with a ballot item in principle. We might think that that type of climate reporting, if that's what the case is, is important. But we look at what the company is already disclosing. If the company is already doing it, we're not going to vote in favour because that's really confusing for management," she said.

OSC vice-chair Wendy Berman says the lack of consistent terminology for investors, regulators and the financial sector has added to the state of confusion. However, BlackRock managing director of investment stewardship Michelle Edkins cautioned against imposing rigid standards while ESG is still rapidly evolving.

"BlackRock definitely agrees that it's way too early to be establishing here. Just because we see it rapidly changing," she said.

David Rutherford of NEI Investments says the lack of clear ESG standards today places an "unfair burden" on investors. Like Edkins, however, he also sees risk in cementing a set of definitions too soon.

"Sometimes I think we're imposing our historical structures on something that is actually fundamentally different," he said.

"Retail investors.. they're using responsible investing for a very different reason. For many of them, it's not just to grow wealth. And for some, it might not even be primarily to grow wealth. It's all about using investment approaches to drive change."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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