Demystifying ESG concepts

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This written interview with Harald Walkate from “The Diversity Blog” is a good piece for beginners in the ESG field. Here’s an excerpt:

PG: Regulatory guidance could vary from a regulator to regulator. Do you see emergence of a common standard?

HW: Not really. Roughly speaking you see regulators who expect a lot from disclosure, with the idea that once we have transparency on ESG things that companies and investors will do something about them – something I’m rather skeptical about. And then there are regulators who try to directly change, incentivize or ban specific activities, which makes more sense to me. There does appear to be a common standard emerging in how regulators are looking at ESG funds, in many countries (eg. UK, Switzerland, Denmark, US) guidance has been issued that – boiled down to the bare essence – tells investors to “say what you do, and do what you say”. This is very similar to my Conviction & Narrative approach.

PG: What is the significance of a fund label? Can it trigger greenwashing? Constituents of ESG fund sometime look no different from any other fund?

HW: The significance of labels is extremely limited. There are many labels out there, with different standards, which is confusing to the customer. Also most labels are pretty easy to get, as long as you pay. And then there are new ‘labels’ in the form of Sustainable Finance Disclosure Regulation (SFDR) classifications article 8 and 9 – those are actually free (even though you have to disclose a lot of information on those funds but that’s doable for most large asset management firms) and the requirements for when you can opt for art. 8 or 9 are relatively light. In other words, yes, there are a lot of funds out there that have some ESG label or indicator on it, but the asset manager will have a hard time showing “what’s ESG” about the fund, and indeed many of these funds will be basically undistinguishable from conventional funds.