Are we nearing the end of ESG’s growing pains?

Results of Dragon's Den-style competition of asset managers highlight need to keep up with maturing landscape

Are we nearing the end of ESG’s growing pains?

This article was provided by Millani and the Trottier Family Foundation.

If you saw recent reports about the state of the ESG landscape, we would understand how you might think the acronym stands for evasive, sanctimonious, and garbled.

Much like a gawky teenager, the coming of age of ESG as a moral and business imperative is going through some growing pains, yet the negative news cycle carries with it a valuable lesson that should not go unheeded.

In the eight months since we launched the Great Canadian ESG Championship, a Dragons’ Den-style competition for a slice of a $104.5M ESG investment mandate, we have witnessed events and public scrutiny in the US and Europe that highlighted the importance of stricter regulation and standardization to create greater clarity for asset owners and more competition for asset managers.

When people think about ESG, some still worry about low returns and have legitimate concerns about product mislabelling. Due diligence and validation can rectify product concerns, but universally recognized standards and definitions are ultimately required to make the labelling less convoluted.

ESG is first and foremost a risk management tool, and anyone with mutual funds or a pension plan should care about the role material Environmental, Social and Governance considerations play as part of their fiduciary responsibilities. When active asset owners and managers are engaged in ESG it can also enhance long-term risk adjusted returns and financial stability.  But it goes beyond just financial risk management. A whole new economy is flourishing to meet the evolving risks and opportunities associated with climate-related liabilities and new companies are surfacing that require significant capital to bring innovative ideas to life.

Despite the huge shifts we’ve seen across the ESG ecosystem over the last five years, it still feels like the Wild West for asset owners. Between impact investing, green funds and sustainable development, not all funds are created equal. In the investment proposals we reviewed for the competition, some asset managers used a variety of benchmarks, standards and highly creative definitions in their investment policies.

During the Great Canadian ESG Championship, validators had to decipher what pieces of the proposals were marketing-speak and what truly communicated their firm’s processes and policies – not only within their ESG funds, but throughout their organizational infrastructure. Surprisingly, the firms with the most resources and capacity didn’t necessarily have the upper hand in the competition.

Make no mistake: The financial sector does takes ESG seriously. However, a broader societal transformation is afoot and combatting greenwashing will require a collaborative and sustained approach. Asset managers have to step up and evolve their ESG approaches to keep up with the maturing landscape; governments (at the federal and provincial levels) have to step in and align on common standards and definitions, and asset owners have to step over their fears and challenge the industry to do more.

With Europe’s Sustainable Financial Disclosure Regulation (SFDR), and the regulatory momentum around ESG fund disclosures in the U.S., we now have a compelling roadmap towards better reporting and transparency. Recent regulatory scrutiny has also caused a chain reaction for managers to be more proactive in validating their process and ensuring their marketing isn’t misrepresenting their funds. As it stands, asset managers with an international presence are following European standards to get ahead of the curve, offering quality ESG products to remain competitive in the evolving landscape.

The bottom line is there is no one way of thinking about and acting on ESG considerations; if there was, we wouldn’t have a competitive market. However, the competition proved to the co-investors there is a mature selection of Canadian asset managers offering robust ESG products. They are doing an impressive job of integrating ESG throughout their firm and improving transparency, fund performance and how policies are communicated. 

Materiality is a key component of ESG. Purpose, intentionality, and action rule. Our hope is that FOMO (Fear of Missing Out) will now drive the change the industry needs.

Ultimately, this shouldn’t be a competition where there are winners and losers. If everyone gets into the game, we can all win.

It’s time to make a statement that the time for blanket statements is over.

Milla Craig, is the founder and president of Millani. Éric St-Pierre is the executive director of the Trottier Family Foundation