Any other business: Socially responsible investment has grown in popularity in recent years, filling up column inches in the industry press and sections of annual reports, where schemes and asset managers outline their philosophies and approaches.
Where environmental, social and governance considerations can be shown to lead to better investment outcomes, it would be difficult to argue against their inclusion.
However, one of the potential challenges SRI can pose lies in its appeal; companies that are seen to do good things get good publicity, as they should, but overhauling existing systems and processes to improve capabilities is time-consuming and expensive.
This can lead some to make only slight cosmetic changes to their products or process to make it unduly more appealing to investors, a practice known as ‘greenwashing’.
So how can trustees tell whether managers are sourcing and managing assets sustainably, or approaching ESG as a tick-box exercise for the sake of good PR?
Look at the investment process
Eoin Fahy, head of responsible investing at KBI Global Investors, laid out some key indicators that can help unearth 'greenwashing'.
To begin with, he said, look at how ESG factors fit into the investment process.
“What investors are looking for is an investment process that incorporates it in a meaningful way,” he said, warning against those for whom the process is “basically the same as it was three years ago”.
Trustees can also look at how the manager carries out stewardship and engagement with companies it invests in, or look at who takes responsibility for ESG integration within the manager.
“Do they have a committee or head of ESG?” and “how senior is that person?" Fahy said. "See how involved they are with industry bodies and staff training.”
Besides anything else, he said, trustees can simply ask the fund manager why they incorporate ESG, as some may be looking to widen their range of products to offer or simply respond to consumer demand.
“Is it to sell more products? Is it because investors are asking? Do you believe in it?”
Getting help
Ralph McClelland, associate director at law firm Sackers, said trustees’ ability to engage would be constrained by “what you hold and how you hold it”, as schemes with large direct holdings may be more able to exert influence than a smaller investor with holdings through a pooled fund.
Ultimately, trustees should be able to look to their consultant to investigate and make recommendations on the credentials of a manager.
“Some [consultants] will have people whose role it is to look into ESG factors and do due diligence on products,” he said. “It’s fair to expect [trustees] to be looking to the consultant to help them with challenging greenwashing.”
However, some consultants are lacking in this area, according to Richard Butcher, managing director at professional trustee company PTL. He said one consultant laughed at him for bringing up ESG investment in a trustee meeting.
MPs press government to incentivise ESG investment
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“I’m not sure it has been widely bought actually. I think it should be, but I don’t think it has,” Butcher said.
This lack of full mainstream acceptance makes it less likely trustees will be educated and confident on ESG issues, he added.
“While trustees are long-term investors, they tend to be short sighted,” he said. “I don’t think [ESG] gets the air time it deserves. It would be easy to greenwash a trustee.”
