With the growing popularity of environmental, social and governance (ESG) investing comes a greater need for investors to fact-check companies claiming to be green, says Tim Woodhouse, portfolio manager of J.P. Morgan Asset Management’s Global Sustainable Equity Fund.
Woodhouse said investors’ increased focus on ESG and the flood of money earmarked for sustainable funds has created an incentive for companies to be seen as green, even if they aren’t.
“I think the past two years have really seen an inflection point when it comes to the publishing of relevant data, communicating more on the topic and, most importantly, actually thinking more about sustainability in the way they operate,” he said. “There’s still a huge gap, however, between those companies that do it well and those that don’t.”
Woodhouse said companies are under great pressure to consider sustainability issues in their decision making, and to encourage their employees to meet ESG targets. The rich rewards at stake lead some to exaggerate their successes and sweep their failures under a rug.
“There is a huge problem with poor data,” he said. “That can range from inconsistent reporting standards to very poor data coverage when comparing performances. As a result, our approach is research driven.”
He said it is critical for potential investors to understand business models, consider the unique sustainability challenges each company faces, and examine operational reports very carefully.
“We don’t believe that sustainable investing means simply believing external data sources,” he said. “We dig into the data, we look to test it, and we ultimately have to reach our own conclusion on whether a company is a sustainable leader. This is an important tool to ensure that companies are not simply greenwashing, and to ensure that we’re not standing idly by as they do.”
Blindly following promises and claims would be a failure of due diligence, he said.
“In our minds, that would be akin to listening to someone give you a stock recommendation and then simply buying it, without doing your own research,” he said. “That’s not what being an engaged active sustainable investor should mean.”
He said there are plenty of examples where companies manipulate data to appear better than they are. In the automotive industry, for example, some carmakers test emissions in real-world situations, using data from millions of miles driven on actual roads. Other carmakers will test their vehicles in optimal lab conditions, using generous assumptions along the way.
According to Woodhouse, investors need to understand the methodology that companies use to calculate important disclosures, dig into company details, and get to know the positions of senior executives on the subject of ESG.
“When you do that, it becomes quite apparent very quickly where sustainability is truly important to a business, where it’s changing their behaviour, where they’re thinking about [it] in every decision they make, or whether it’s just greenwashing and they’re doing it to try and convince us as sustainable investors that we should own the stock,” he said.
One trick to validating a company’s commitment to sustainability is to ask about the path to achieving targets.
“If companies can’t give us tangible plans as to how they’re going to reach those targets, and walk us through the steps they’re going to take over the coming years, we’re not going to give them credit for it,” he said. “We’re not in the business of simply saying, ‘OK as long as you publish the target and put it out there in the market, then you’re fine.’”
Sometimes a company will insist their targets will be met with the use of technology that hasn’t been developed yet.
“Well, for us that’s a big red flag,” he said.
“Sustainable investing is about more than simply looking at an MSCI ESG score and then picking those that look best. It’s about doing the due diligence. It’s about really understanding what a company is doing under the surface, and about helping this company to understand best practice. It’s about holding companies that engage in greenwashing or unsustainable practices accountable,” he said.
“As sustainable managers, we’re here to make money for our investors. But we’re here to do so in a way that promotes sustainability.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.