ESG investments and the ‘real-world’ impact

Date: 15 Mar 2023

Silvia Ricciardi

Stephen Metcalf, Head of Sustainable Investing at RBC Wealth Management, gives an overview on the latest ESG investments and programmes.

Citywealth asked Stephen Metcalf, Head of Sustainable Investing at RBC Wealth Management, to give an overview on the latest ESG investments and programmes, mentioning the impact of climate change and greenwashing and talking about what can be envisaged for the future.

In your experience, what ESG programmes are delivering results?
I think we have seen a fair amount of progress in disclosures from companies. Partly driven by regulators as well as investors, there is now significantly higher quality information available than five years ago. However, there is still progress to be made in improving quality and usefulness.

As wealth managers, we have also seen improvements in product innovation. We are now able to build more comprehensive and diversified sustainable investing solutions for clients. In particular, there has been a lot of innovation in fixed income and the broad alternatives spaces.

How do ESG investments deliver social impact and concrete solutions?
The tag “ESG Investments” covers a wide range of products, from exclusion-based funds to ESG-integrated active funds. The real-world impact of these solutions can vary greatly. The ‘additionality’ requirement of the typical definition of impact is very difficult for many ESG investments to meet.

For example, take an active mutual fund that invests in listed equities involved in renewable energy. Despite being a highly ‘impactful’ investment on the face of it, it is very difficult to measure the marginal real-world impact of buying shares of these companies on secondary markets. On the other hand, if an activist PE investor takes over a high emitting steel company and drives emissions down by pivoting to low carbon steel, the impact is much easier to measure. Overall, investors need to be aware that approaches vary hugely, and an “ESG Investment” doesn’t necessarily translate to real-world impact.

Is climate change the main issue?
In a word, yes. The global scale of climate change – and all its interdependences with natural and human systems – make it an existential threat. The World Economic Forum consistently ranks climate-related risks as the dominant features of the risk landscape in terms of both immediacy and potential impact.

However, this is not to diminish the importance of other ESG issues, such as human rights or diversity and inclusion. And of course, different investors will have different priorities and time horizons.

How does ‘greenwashing’ impact ESG investments?
‘Greenwashing’ undermines credibility and public trust in the financial system. The financial industry has a decisive role to play in improving sustainability outcomes along multiple margins, especially climate change. However, it can only do this with the confidence of investors – and greenwashing puts that at risk.

Do private clients need to find a topic related to ESG and select funds accordingly or should they rely on third party help, like a lawyer or investment manager?
It is still really challenging. You have to dig quite deep to find out what you are actually investing in, grapple with a lot of jargon and understand different, and new, types of investment strategies. Asset classes differ and regulatory definitions are not necessarily clear cut. Investment managers are there to do all this work for you. Investors’ time is better spent thinking about what they really want to achieve when considering “ESG Investments” and what they are potentially willing to give up.

What should be expected for the future?

Greater product sophistication and customisation. Different investors have different priorities when it comes to ESG and sustainability, on top of their different financial constraints. Whether it be a focus on specific ESG issues, or a desire to see material real-world impacts, investment managers will have to evolve product offerings and report their performance along new margins.

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