While data gaps and definition standards have
hindered the finance industry’s adoption
of environmental, social and governance (ESG) strategies, it is easier for investors to see where their sustainable investments are going in fixed income rather than their equity counterparts, according to Rafaelle Lennox, senior ETF specialist at Franklin Templeton.
Speaking at a decarbonisation event hosted by Maitland/AMO and moderated by ETF Stream’s David Stevenson, Lennox (pictured) discussed the perspective of asset managers within ESG.
Lennox does not come across many investors that believe incorporating ESG means giving up on performance.
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While there have been many studies that say incorporating ESG factors can lead to outperformance, there are arguments that the outperformance is coming from one exposure in particular.
“An argument for ESG ETFs outperforming is that technology stocks have been big drivers on the positive," said Lennox. "But as an asset manager, we have responsibilities at various levels."
“One of the big things we do is direct finance towards green and sustainable projects and educate investors on what they can do.”
A popular strategy among ETF issuers is to exclude stocks that are not considered sustainable, most notably fossil fuel companies. However, this strategy has been used for years and is becoming unfashionable.
Lennox said: “Investors have different investment objectives such as reducing their exposure to fossil fuels which have gone out of favour as there have been pension funds and different institutional investors have done via segregated mandates and pooled vehicles for decades.”
According to Lennox, investors use two different angles when tackling decarbonisation: aligning their portfolios with the transition to a low carbon economy as well as reducing their climate change risks within their portfolios.
ETF issuers and financial firms are offering more solutions within this space to support investors in tackling decarbonisation.
Additionally, Lennox said the European Union is launching a key objective to support financial firms to encourage and direct funding towards these strategies as significant funding is required to meet the targets of the Paris agreement.
In tandem with ETF issuers pushing more sustainable investments, there has been a flurry of greenwashing issues as funds labelled sustainable have been found to include oil companies leaving investors uncertain about what exactly they are investing in.
In addition to greenwashing, it is difficult to measure how sustainable a company is. A company might have a sustainable profile and main objective but could have other projects or developments that do not meet ESG standards.
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This is more prominent within equity, as well as the other previously mentioned issues, however, Lennox believes fixed income can be far more transparent.
Lennox concluded: “Within fixed income, it is even more direct. In active green bond funds, every one of those issues is raising money for an environmental project.
“It can be even more black and white as you can see the proceeds raised are going specifically to an environmental project as opposed to equity strategies where a company that might have a sustainable profile is doing conflicting activities on the side.” However for all securities, an assessment also needs to be made at the issuer level.