The sustainable investing goldrush has attracted both money and mischief. How the industry tackles the mischief will determine how much more money flows in and how much good it will do once it gets there.
Investors are enlivened by the opportunity to marry up their social and investment goals. Product providers and advisers are keen to conduct the ceremony.
Yet where there is a gold rush there are cowboys. And in personal finance, where there are cowboys, there are regulators to protect investors from rogue agents.
In this case, ones promising to save the planet, while doing little more than painting their Stetsons green and claiming their spurs are ‘horse-friendly’.
Regulations need to provide enough guidance to be effective without becoming over-prescriptive. This is a difficult balance to find.
It is all too easy to unintentionally turn valuable investor protection into a toothless tick-box exercise, meeting the letter of the law, but failing to serve its spirit.
Moreover, and of particular relevance to environmental, social and governance issues, the harder it is for consumers to verify the promises they are trusting – looking at what the carbon emissions of this group of companies are and whether that is good or bad – the more likely that shortcuts will be taken.
For financial services companies, however, treating sustainability preferences as a tick-box exercise is a false economy.
Shortcuts in sustainable suitability that fail to meet real preferences or deliver real outcomes not only mislead investors but also lead the promoters of the greenwashed products somewhere they do not want to go: into regulatory trouble and dawn raids.
If it is ruled that an investor’s sustainability preferences must be ‘considered’, an investor stating, ‘Yes, I’d like some ESG’, and ending up with a token-gesture allocation to a fund that changed its name to include ‘green’ a couple of weeks before would tick the box, but it would be a stretch to call it either sustainable or suitable. It would meet the letter of the law, but it would be insulting the spirit of it.
If those charged with understanding investor preferences do so only superficially, history strongly suggests they are going to pay for it somewhere down the line.
The good news is that there need not be a trade-off between making suitable sustainable recommendations and making money: there is profit in the proper appreciation of investor preferences.
There are two main reasons for this, and they each spring from understanding that ESG opportunities are not only new things to invest in but a new way to see investing. ESG should be seen as less about shuffling assets around and more about engaging new groups of investors.
First, non-superficial approaches to sustainable investing will lead to cash being invested that would otherwise have stayed on the sidelines.
For many would-be investors, long-term risk-return statistics are a less compelling story without the emotional returns of also pursuing sustainable outcomes. At Oxford Risk, we have strong evidence that merely asking clients about ESG increases their engagement with investing as a whole.
