'People should tell the truth about what they're doing, and explain it in terms their stakeholders can understand,' says UPP senior managing director
Despite the geopolitical risks and the current economic climate, Environmental, Social, and Governance (ESG) integration continues to grow in importance, particularly among institutional investors and pension funds. With increased scrutiny from regulators and investors, the need to clarify ESG practices and counteract greenwashing is becoming a central theme for many organizations.
Thematic investing based on ESG trends has also gained significant interest, driven by Canada's net-zero emissions commitment and growing stakeholder expectations for ESG integration in investment programs. Large Canadian pensions saw sustainable investments rise from $163 billion to $276 billion in one year due to climate concerns and global social issues. And as a Mackenzie Investments study found earlier this year, despite 23 per cent of Canadians currently engaging in sustainable investing, 61 per cent continue to have concerns about trust and transparency, especially when it comes to greenwashing.
It’s clear the need for consistent and transparent ESG disclosure standards and regulatory frameworks has accelerated as ESG investing grows. Brian Minns, who’s the senior managing director of responsible investment at University Pension Plan (UPP) and Mary Jane McQuillen, portfolio manager and head of ESG at ClearBridge Investments, part of Franklin Templeton, emphasized that greenwashing, where companies or funds overstate or mislead their commitment to ESG goals, is an issue both acknowledge as a real concern.
McQuillen pointed out that the proliferation of ESG-labeled products in recent years, which became more difficult for investors to be able to distinguish the difference between them has led to a “siphoning” process by regulators; particularly in Europe, where the Sustainable Finance Disclosure Regulation (SFDR) now aims to filter out false claims.
This has led to stricter requirements for funds to justify their ESG credentials, with many funds having to reclassify or even remove ESG terminology from their names. The latest discussion therein lies around naming conventions and whether companies can use the word ‘sustainability’ in the fund name if they’re not meeting criteria.
“You have to have a certain percentage of that in the portfolio to be allowed to use the name ‘sustainability’,” she explains. “Between the disclosure requirements, the categorization, the naming rules, we've seen a lot of funds “deregister themselves”, we’ve seen funds withdrawn from the marketplace or taken off shelves, and we've seen funds change their names to remove sustainability. It’s now caused managers to have a good look at themselves and say, ‘Can we say we do this to the public through these disclosure requirements?’”
Minns shared a similar perspective, recognizing that while greenwashing remains a real issue, he sees a correction happening. "We're in this phase of a little bit of correction on greenwashing and going back to basics," he says, adding that this trend will likely lead to more transparency and honesty from companies regarding their ESG commitments.
He explains UPP's approach to addressing greenwashing includes a focus on stewardship and clear communication of their investment policies and practices. Minns notes that UPP works to ensure their partners and investment managers are properly identifying and addressing material ESG risks and opportunities. Additionally, UPP aims to be transparent in how they are incorporating ESG considerations to meet their fiduciary duties and investment objectives for their beneficiaries.
Minns believes ensuring that companies communicate clearly and truthfully about their ESG practices is vital to maintaining trust and credibility with stakeholders. “People should tell the truth about what they're doing, and they should explain it in terms that their primary stakeholders can understand,” he adds.
Looking ahead, both Minns and McQuillen expect ESG integration to remain a focal point for institutional investors, with climate change and social equity likely to dominate the agenda. According to McQuillen, climate change is a particularly urgent issue, with companies increasingly focused on aligning with initiatives like the Paris Agreement and Science Based Targets Initiative. The U.S. Inflation Reduction Act, she added, is likely to spur further investment in clean energy and environmental initiatives, “including health care, like capping prices for insulin for retirees,” she highlights.
While Minns points to the reduction of emitting greenhouse gasses to help mitigate climate change, he asserts that politically, this can be challenging. “We know that society needs to reduce greenhouse gas emissions drastically to address climate change and we have all the tools and technology to do so now, but implementation is a socio-political challenge that citizens around the world need to support.”
“Inequality is another challenge our society faces, making it harder to tackle other issues like climate change. If people are disadvantaged and they're finding life difficult, then they're going to find it difficult to adopt to policy changes that they might not see the benefit from for years to come,” he says.
