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What Exactly Is ESG Investing And How Does Greenwashing Come Into Play

Invest in the change you want to see.

Whether you invest for growth, dividend, value, or any other factor, most investors invest with a purpose. ESG investing is no different. ESG stands for “Environmental, Social, Governance” and ESG investors invest with these sustainability goals in mind.

Traditionally, investing has always been done with financial metrics at the forefront. Investors and fund managers prize returns and the company reports have correspondingly evolved to focus on the financials. The stock markets has also evolved to have robust financial reporting requirements for listed companies.

The one of most powerful choices we have as investors is where we place our money. Are you a true environmental advocate, even if you convert to a zero-waste lifestyle but your investments are in the oil and gas industry? This dichotomy between personal values and investments is one of the factors that drive the look away from pure financial metrics when it comes to investing.

In recent years, investors have started to look at other non-financial factors and many of these factors fall under the realm of ESG investing.

Read Also: Step-By-Step Guide to Stock Investing in Singapore

ESG Stands For Environmental, Social and Governance

ESG investing is associated with a socially responsible approach to investing where investors look at non-financial metrics (along with the traditional financial metrics) to decide the companies to invest in.

These ESG metrics cover the areas of Environmental, Social and Governance.

Environmental may be the better-known aspect of ESG investing. It covers the environmental factors related to conservation of nature, climate change, carbon emissions, green energy, waste management, sustainability of its supply chain, etc.

Social covers the social impact of the company. This can be both internal to the company as well as external. It includes employee’s health and safety, gender and diversity, corporate social responsibility, hiring practices and social good in the wider community

Governance is concerned about how the company is managed. It includes issues revolving the company’s board and management, such as executive pay, diversity in leadership, lobbying, etc.

While sustainability is a word associated with ESG investing, it does not form the S in ESG. Instead, the 3 areas of ESG taken together can be seen as how sustainable the company is and sustainability practices would often fall under one of the 3 pillars.

Read Also: Gender Equality: 6 Singapore Companies Leading The Way And How They Did It (According To The Bloomberg Gender Equality Index)

ESG Reporting Is Still Nascent

Financial reporting has been well established for listed companies and much of it is standardised such that investors can easily compare the various financial metrics. This is an aspect that stock screeners utilise to help investors pick and choose the companies to invest in.

For companies listed in the US, financial reports generally adhere to generally accepted accounting principles (GAAP) which are enforced by Securities and Exchange Commission (SEC). Likewise, our local bourse, Singapore Exchange (SGX) also has requirements on financial reporting. Regulators can also impose punitive measures for errant reporting

However, ESG metrics are still in development with different companies/ research firms using different methodologies to evaluate and score ESG measures. This can make it hard to compare these non-financial metrics across different companies, much less across different industries or countries.

Read Also: Step By Step Guide To Using SGX Stock Screener To Find The Best Undervalued Stocks For Value Investing In Singapore

Lack Of Clarity And Alignment On ESG Ratings

In November 2021, the International Organization of Securities Commissions (IOSCO) published its report and recommendations regarding ESG ratings and data product providers. They found that there was little clarity and alignment on definitions, including on what ratings or data products intend to measure as well as a lack of transparency about the methodologies underpinning these ratings or data products. This lack of clarity and alignment also extends to the coverage of the different industries with some industries or geographical areas being better covered than others.

Currently, there is also no consistency in the way providers obtain their data. For example, MSCI ESG Research uses objective rules based ESG ratings, with an average of 45% of data coming from alternative data sources while utilizing AI tech to extract and verify unstructured data. Meanwhile, the Dow Jones Sustainability Index is based on the S&P Global’s Corporate Sustainability Assessment (CSA) which is submitted by the participating companies.

Read Also: 4 Singapore Stocks For ESG Investors: City Development (C09); DBS (D05); Capitaland (C31); Sembcorp Industries (U96)

Greenwashing Can Happen

In a part because of the lack of standardised reporting and in part cashing in on the demand for ESG products and companies, companies or investments may misrepresent or oversell their sustainability claims. This misrepresentation of making something more sustainable than its actual state is greenwashing.

It is possible for some ESG funds to include oil and gas companies which is unintuitive for most people as oil and gas companies are not known to be environmentally friendly. As there is no consensus on how to define ESG investing, fund managers can pursue different investment strategies, including an inclusionary approach and include oil and gas companies. By doing so, they may position themselves to take advantage of the transition to low carbon while reaping the attractive returns or play an active role in engaging with management to reduce emissions and improve environmental practices.

Depending on whether a fund has adequately disclosed its investment strategies, this may or may not be seen as greenwashing.

Read Also: 4 Stocks This Week (Sustainability) – CapitaLand; Tuan Sing; SIF; Boustead Projects

Regulators Have A Part To Play

As ESG investing becomes more popular, regulators have paid increasing attention to this field. In fact, SGX is in the process of rolling out mandatory climate reporting on a ‘comply or explain’ basis in their sustainability reports from FY 2022. This will be made mandatory for issuers in the financial, agriculture, food and forest products, and energy industries from FY 2023. To help companies fulfill their sustainability reporting rules, SGX RegCo has launched 8 sustainability courses that directors of listed companies can attend.

We Have To Play Our Part As Investors

Regardless, as investors, we have to play our part to remain knowledgeable and keep abreast of new changes. As Singapore (and the world) moves towards sustainability, our choice as investors on where we place our monies becomes more important in driving the changes we want to see. Instead of relying on information that may be greenwashed for our consumption, we should question and examine the ESG ethos of our investments.

To help our readers on this journey to sustainability and investing, we have launched a new ESG category to feature all the ESG related content on DollarsAndSense. Remember ESG isn’t just about the Environment, it is also about the Social and Governance impact. Invest in the change you want to see.

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