Investors who won't compromise on environmental, social, and governance issues will have to scrutinize socially responsible investments if regulatory frameworks aren't in place to closely monitor companies' claims.
“In the past, ESG was much more Europe-driven, and European companies were at the forefront,” Steven Fox, CEO and founder of Veracity Worldwide, told Yahoo Finance at the 2021 Concordia Summit. That changed during the pandemic, “and we would say in the last 18 to 24 months, there's suddenly been a sea change among U.S. companies with a real interest in ESG issues.”
Consequently, a rising cohort of ESG investors now rely heavily on companies’ voluntary disclosures or ranking systems that try to standardize disparate metrics, sectors, and jurisdictions.
“It's easy to rely on rankings," Fox said. "The problem is that rankings have many limitations and shortcomings, and there's lot of ink that's been spilled on that topic."
Fox argued that investors should really look deeper into their ESG holdings to better understand how companies are handling ESG policies or risk being exposed to greenwashing — what some critics have called companies that claim to be more ESG compliant than they really are.
“It's what we would call ESG intelligence as opposed to just having ESG rankings,” Fox said. “Can you really get down to the heart and the core and ask penetrating questions and truly understand what's happening in a company precisely to avoid those greenwashing type of situations?”
Greenwashing risks giving consumers and investors a false sense of how a company does business, and it even allows companies to collect an undeserved premium on their so-called green products.
When it comes to ESG ratings, “there is a higher degree of self-policing... where companies are worried about being called out if they make a statement that proves not to be correct, and as a result, they want to make sure that their own house is in order before providing information to the ranking agencies,” Fox explained.
Fox advised investors to dig deeper into the companies to actually find out if they are green or not. Investors may even have to consider subsidiaries of the company, which may not always follow the same guidelines of the main company.
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