‘ESG screening means too many things’

PRI conference hears why the strategy is leading to greenwashing

Screening, as an ESG strategy, means too many things to too many people, and the confusion is leading to claims of greenwashing, a Principles for Responsible Investment conference in Barcelona heard last week.

According to Simon O’Connor, CEO of the Responsible Investment Association Australasia and chair of the Global Sustainable Investment Alliance, many screened products are in need of clarification.

He said for the 15 years the investment association has been running a labeling program, which has certified some 300 products, around 80% have needed to be sent back to the provider initially so they can make changes to their product’s legal documentation, offer documents and marketing and labeling to get more precision on claims being made.

“Often those are … around screening-based claims.

“As we all know [there are ] different revenue thresholds, how you define sectors. And really commonly, now increasingly, we see exclusions around fossil fuels. And obviously … there’s 100 different ways you can define which part of the fossil fuel value chain you’re referring to when you’re talking about a fossil fuel screen,” O’Connor said.

These things can lead to intentional or unintentional greenwashing and confusion, he explained.

With the panel discussion focusing on harmonizing global responsible investment terminology, O’Connor argued “terminology is … a foundational building block upon which this industry needs to professionalize.”

Similar concerns around screening were shared by fellow panelist Chris Fidler, senior director, global industry standards at the CFA Institute and ESG Clarity EU Committee member, who said positive and negative screening are some of his least favorite terms in the sustainable investing lexicon.

“Screening has multiple parts to it – there’s an intent or purpose of the screen, there’s the characteristic that you’re looking at, there’s the action you’ll take, whether you’ll include it or exclude it, and there’s the criteria that you’re using and whether or not that’s absolute or relative.

“When you look at definitions of positive or negative screening, people will highlight different aspects of the screen. Some definitions of negative screening say it is products and services, some … just that it’s exclusionary, and some definitions say it’s done for ethical reasons.

“So there’s just a lot of inconsistency among those definitions.”

Fiddler also noted positive screening can be positioned alongside best in class, which he sees as conflating two very different concepts.

Precise descriptions needed

Panelist and global head of ESG and climate research at MSCI, Linda-Eling Lee, said the industry needed to make progress on getting more specific definitions of what a product does.

“I’m very much of the view that we should actually get to much more precise descriptions, rather than worrying about whether something qualifies under a more general term.

“For example, I think everybody here in the audience has probably had several years of working with low-carbon strategies, we know low-carbon strategies can range from … fossil fuel-free versus the least carbon-intensive in every single industry, which would not be fossil fuel-free in the energy sector at least.

“If we stopped trying to define the term ‘low carbon’ and actually just said ‘this one is a fossil fuel-free fund, and this one is a less carbon intensity for every industry fund’ … just got precise and descriptive, we would dispense with a lot of the confusion around terminology,” she said.

‘ESG integration’ most confusing

However, Lisa Woll, CEO of US SIF (The Forum for Sustainable and Responsible Investment), told delegates her organization’s most recent trends report found it has been the strategy ESG integration, which entered the US market in 2014, that has caused the most confusion.

“If you look at the firms that have been associated with greenwashing, it’s largely around the term of ESG integration, because it’s been able to be used in a way that can mean anything and everything.”

See also: – Does categorizing funds as ‘ESG integrated’ make sense?

Woll said despite this, there has been a lot of progress in getting clarity around terminology over the past seven years and US SIF supports the Securities Exchange Commission’s current attempt to define disclosure standards by funds.

Labeling vs marketing

The panelists also discussed the role of marketing in how terminology can end up confusing the end investor. O’Connor noted there can be products with strong strategies that then have their label simplified for something “cooler” sounding by the marketing desk at the firm.

While Lee pointed out marketing departments can be very keen to emphasize “happy incidentals” – in effect, positive attributes of a fund that are measurable but not intentional.

“That is where they start changing the language a little bit. There’s the slippage. One really big problem is that the people practicing [sustainable investing] might be very clear on it but the people not using this data, and maybe not taking as much care about intentionality, are not necessarily translating that into the catchall naming,” she said.