ESG’s wild west ripe for crackdown, seasoned investor says

Content of the article

There is an ESG investing veteran who can’t wait for stricter regulations to stamp out the misrepresentation of fund managers in the $ 35 trillion industry he has helped defend.

Content of the article

Matt Patsky, who heads Trillium Asset Management, began researching environmental, social and governance investments in the 1990s, long before most fund managers even thought of ESG. He now believes that only a fraction of current ESG assets are bona fide sustainable investments.

Regulators’ efforts to curb ESG claims from fund managers are “the best thing that has happened to the industry in years,” said Patsky, whose Boston-based company manages US $ 4.8 billion, in an interview. “It takes a close look at a region that has become the Wild West, where fund managers have the discretion to apply ESG labels to anything.”

Patsky, whose main fund has returned nearly 20% through August, says fund managers who tell clients they are making ESG investments without rigorously pushing companies to do less harm to people and the planet are not the real deal. He hopes tighter regulations will help thin the herd. The 58-year-old despises fund managers who only use ESG data, which he says is wrong, to pretend they are investing sustainably.

Content of the article

After years of unbridled growth, the ESG sector is now facing new regulations. In Europe, the Sustainable Finance Disclosure Regulation went into effect in March and now requires fund managers to start curbing bloated ESG claims. The anti-greenwash regulation is the most ambitious of its kind in the world, but US and Asian regulators are catching up with growing concerns about funds exaggerating their green credentials.

Patsky, who introduced the world’s first “green chip” index of socially responsible businesses in 1994, estimates that of the $ 35 trillion the Global Sustainable Investment Alliance says is parked in sustainable investments, less than $ 1 trillion of US dollars are in “ESG. Of that, $ 500 billion is managed in Europe and up to $ 300 billion in the United States, he said.

Content of the article

Such warnings are becoming more frequent as the mood around ESG changes. Some industry insiders have made allegations of greenwashing against their former employers. And asset managers are starting to rethink the way they label and sell ESG funds to avoid being named and humiliated. US and German regulators are investigating Deutsche Bank AG’s investment unit after its former chief sustainability officer accused it of ESG “propaganda”. Asset manager DWS Group says it hasn’t done anything wrong.

While sustainable investing lacks definitions and is based on inconsistent benchmarks and poor data, Patsky says he’s happy that businesses and finance are paying more attention to issues such as gender inequalities, human rights violations. human rights in supply chains and climate change.

Content of the article

To be a credible socially responsible investor, Patsky says managers must first be skeptical of ESG rating data, which he says is riddled with errors. These issues make passive ESG investing impossible, he added.

Patsky says he’s challenging a strategy that now accounts for the lion’s share of sustainable investing assets called “ESG consideration”. The label means that fund managers take ESG risks into account in their investment models, but do not necessarily modify their investments accordingly. According to the GSIA, some $ 25 trillion is included in this strategy.

“It shouldn’t even be ESG labeled because it doesn’t fully integrate sustainability,” Patsky said.

His checklist for being a serious ESG investor includes pressuring business leaders to change the behavior of their companies, filing shareholder resolutions, and voting on those tabled by others.

Content of the article

“Unless that happens, most ESG factors will be largely ineffective in resolving systemic issues quickly,” Patsky said.

Trillium itself lobbied companies such as Johnson & Johnson and Starbucks Corp. on issues such as conducting racial audits and reducing the use of plastic. The asset manager was acquired last year by Australian company Perpetual Ltd.

Trillium was founded in 1982 by the late pioneer of responsible investment Joan Bavaria. Its main fund, ESG Global Equity, returned 19.3% through August, compared to the 16.2% gain in its benchmark, the MSCI ACWI Index, according to Bloomberg data.

Bloomberg.com

_______________________________________________________________

If you liked this story, sign up to find out more in the FP Finance newsletter.

_______________________________________________________________