More money than ever is chasing environmentally and socially sound companies. But the sustainable investing boom has not been without growing pains.
The notion that institutional and small investors can back companies that are socially responsible — or ensuring their bottom lines are safe from climate change — has been a boon for Wall Street and Silicon Valley. Investors are seeking out companies that they can feel good about backing, and employers see a strong environmental, social, and governance (ESG) awareness as part of a friendly public image.
That has led to a flourishing industry. Asset managers are launching funds labeled as sustainable; firms are creating new roles to oversee sustainable investments; and a new crop of sustainability-minded startups are drawing large funding rounds. Last year from January through November, assets in sustainable stock funds rose 45% to some $1.3 trillion, a record, according to RBC Capital Markets.
Despite the industry's warm and fuzzy aura, it is not without warts.
The vast sums of money that big investors stand to make from products marked as sustainable has led to a new kind of culture clash, with industry insiders battling critics over the very efficacy of sustainable investing and what standards companies should be held to by lawmakers and regulators.
Experts are meanwhile eagerly watching for a decision may spur even more money into these products in the US. The Department of Labor is expected to offer clarity early this year over a rule proposed last fall that would more easily allow ESG funds into employer-sponsored retirement plans. The Securities and Exchange Commission is also considering implementing new rules this year over the way companies make climate-related disclosures.
For insight into the realities of working in an industry that is growing quickly but still evolving, Insider spoke with five professionals working in sustainable investing and ESG broadly about their roles.
For the most part, they feel drawn to working in roles that have a do-good element to it. Their expertise is in higher demand today than it has ever been. But the reality is, they say, there are intrinsic problems about sustainability that they see day-to-day.
Greenwashing — the act of making empty claims or over-promising about the benefits and characteristics of sustainability plans or investments — is a significant problem. And the very lack of standard ESG terminology is another issue the industry is working to address. One person noted the highly competitive market for finding and keeping ESG-focused talent, and one expressed frustration with not always being taken seriously by the traditional world of finance.
Some experts, whose identities are known to Insider, requested anonymity to discuss their jobs freely. These interview excerpts have been edited and condensed for clarity.
'You have to take things with a grain of salt'
Kuni Chen, head of ESG integration at Seeds Investor, a fintech startup that provides software to financial advisors aiming to invest for clients based on their values:
"At the end of the day, companies will — whether it's financial results or ESG metrics— report the stuff that paints them in the best possible light. You have to take things with a grain of salt, and just try to build a full picture of what the company is up to." "Particularly with the small- and mid-cap companies, there's less available data. You have to rely more on the company-reported ESG metrics. That might put you more at risk of greenwash with some of these smaller companies."
Greenwashing kind of falls into that same skepticism. A company will be telling you about how great and sustainable their business is. And somewhere in the back of your head, you'll say, 'That doesn't make sense to me.'"
"Another challenge that I face everyday when we're making investment decisions in real time is valuation. The market, at this point, can discern good-quality ESG companies. Those companies, particularly ones in the renewable energy sector, tend to trade at higher multiples. You may want to own them from a sustainability standpoint and from a company fundamental standpoint, but the value investor side of you is saying, 'This is too expensive.'"
To read more, check out Business Insider: 5 ESG insiders open up about what it's really like to work in sustainable investing, from tackling greenwashing to battling 'sucker' stereotypes
