Why it is so difficult to ensure an ESG-friendly fund is actually ESG-friendly

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Greenwashing is often spoken about in terms of someone selling a product as “ESG-friendly” to someone, knowing that it isn’t, to the detriment of society as a whole and the buyer. Something less spoken about under the greenwashing umbrella that worries me is that firms may be unknowingly selling falsely branded products because of how many agents there are in involved in investment decisions nowadays.

Consider, what seems on the surface, a very simple and harmless “green” investing scenario: parents who decide to invest to grow their savings so that their child can go to university. Noble, right? Now consider that these parents feel a moral duty to only invest into something with a “green” or “ESG” tag. Even better!

They do not have time to mind the market so are going to opt for a manager’s strategy. This has already hugely complicated whether or not this investment will actually be green. Why? I’m going to explain through a series of example interactions, that, although blunt and perhaps over the top, show how a culmination of day job responsibilities can have lasting negative impacts.

Financial adviser is told by parents what they’re looking for.

1. The adviser recommends from their list of favourite managers which ones best meet the parents requirements.
2. Asset managers want to be on that list, it’s a megabuck sales pipeline opportunity. Sales teams of these managers seek out every opportunity possible to talk to and charm these advisers to even THINK about looking at one of their strategies before considering it for a back row seat on their list.
3. But how will the manager get noticed? There are 300 proposals a day coming through the adviser’s inbox, half of which get filtered straight into the junk folder.
4. Nothing like a face to face! Asset managers host lavish events, lunches and invite advisers and consultants. Whoops there goes a 10 grand bar bill and all its drunken outcomes, where already we’ve struck internal environmental and social problems.
5. At an event, the new graduate sales recruit wants to win over their boss which they know they can do by getting some interest from advisers. They don’t really understand why they need this adviser on board over another one (senior staff know it’s because this adviser more readily assigns “ESG” stamps on strategies, which will lure in noble parents’ money), but since their objective is just about winning some respect around the office, they can knock back some of the free champagne and put their people skills to work. This is not as bad as it used to be, but still happens to some extent.
6. That graduate sales recruit gets excited by the prospect of attracting money into the pipeline. They have some fun chats which can pave the way for a professional relationship, that their boss can then steer towards getting a strategy listed. I think what the graduate has done here is harmless. They just think they are doing their job. They’re being worked deadly hours, and so don’t have time to properly research who they’re talking to.
7. The strategy ultimately gets listed because the manager has put themselves at the top of the adviser’s mind as a result of the event, which could then allow for them to pitch their strategy in a meeting (rather than it going to junk mail).
8. Notice that research analysts or portfolio managers have not been mentioned at all up to this point. Of course, their findings and ESG evaluations are a critical part of whether an adviser likes a strategy, but they are irrelevant in terms of getting the strategy noticed. However full their evaluation of an asset is with respect to ESG elements, sales teams will obviously pick out the best parts. You’re a bad salesperson if you highlight the bad bits.
9. This disconnect between research and sales means that however great returns are, it is not necessarily the most ethical funds that advisers list, but the ones presented by the most charming people who recognise this ESG (unfortunately sometimes termed)“trend”. In this case, that adviser is the one who might not be aware they have favoured one fund over another at the detriment to ESG.
10. The aforementioned noble parents see this strategy in a shortlist from their adviser and invest. Simple as that. People are busy. They use advisers to cut their own ESG-research time. And advisers cut reading emails and cold caller time by listening to who they prefer socially. And because sales teams do not have the power like PMs do to make a strategy more green, they will focus their time on building their pipeline, where their messages rather than the physical make up of a fund are what they can change to convince prospects.

Of course, there are many exceptions and examples out there where ESG investing is truly benefitting the environment and society. Significant work is done by research teams that I have not mentioned here, not to overlook them but because the point of this post is to illustrate that however strong a strategy is in an ESG sense, whether it receives funding is determined by what the every day person wants and how a salesperson can convince that person that what they are selling meets that criteria. There are also great salespeople who do not need to manipulate any ESG story to sell their products.

Another topic I am keen to discuss regarding why a fund claiming to be ESG-friendly might not be related to how it’s subjectivity makes ESG nearly impossible to measure.