Chris Fidler would like advisers to embrace conversations about ESG with clients, and as senior director in the CFA Institute’s global industry standards team, has been part of developing a framework he hopes will help advisers do just that.
Fidler sat down with ESG Clarity in June at the US SIF: The Forum for Sustainable and Responsible Investment conference in Santa Ana Pueblo, New Mexico to discuss the institute’s ESG standards for products and the current environment of greenwashing.
Tell us a little about the process behind the CFA Institute’s global ESG disclosure standards for investment products?
What we’re trying to do is to create a framework by which investment managers can communicate with their clients.
Before those standards existed, different managers would calculate performance in different ways.
There wasn’t comparability, and different techniques were being used. We tried to build our ESG disclosure standards off that same principle of, gosh, there’s just so much inconsistency right now.
How can investors really understand funds that they’re investing in? How can they make comparable performance and decide which one is right for them?
That was what we tried to undertake with our ESG standards. We issued them in November 2021. And that was at the end of the two-and-a-half-year-long process.
How can this help advisers communicate with their clients?
A lot of them are uncomfortable having the conversation with clients that wades into the realm of values. Investment advisers are very comfortable talking about risk and return, but will say, “leave your values at the door, because that could get messy.”
They’re in this conundrum. They’re not really equipped with the tools to have the conversations, and they’re not equipped with the data to make solid recommendations that would align with clients’ preferences. So that’s where I think our standards can help, at least with the data side.
I would love for investment advisers to embrace that conversation with clients. Because this big trend toward ESG products is an extension of trends we’ve seen in other industries.
It used to be you’d go to the grocery store, you’d buy something if you thought it tastes great, and the price was right. But now there’s so many other competitive dimensions. Like, is it fair trade? Is it organic? Is it in the right kind of packaging? Is it recyclable?
It’s no longer enough to just talk about risk and return. People also want to know, for example, [whether] they are earning their investment returns through activities that they’re comfortable with.
Once an industry goes in this direction, and there are more competitive dimensions, those tend to stay.
What did you learn when you were putting together the ESG standards?
One of the most important things to realize is there are many different types of investors. And there are many different types of products.
It’s not uncommon for people to start thinking more narrowly, like “an ESG integration fund isn’t this – it looks like ‘this,’” and not to appreciate the amount of diversity and complexity in the investment product market. That was one of the most challenging things to do, to keep that breadth of perspective. I think we were able to do that. And as a result, I believe the standards we have come up with are very universal in nature.
What are your thoughts on the current state of greenwashing?
People throw that term around pretty casually.
The way we’ve used the term is either intentional or unintentional false or misleading statements about the ESG characteristics of a product, or the way factors are incorporated into the investment product or its ultimate impact on ESG issues. But it’s important that we start identifying the specific behaviors and practices underlying greenwashing, so that we can have a more intelligent conversation about it.
I’m seeing at least a couple different types emerge. One is intentional deception, for which an example might be DWS. The German authorities have raided DWS – I would assume that they wouldn’t do that unless less they had some evidence of some wrongdoing, and maybe some intentional wrongdoing.
Then we have another example of a run-of-the-mill process breakdown in BNY Mellon, where they told investors that the investment process would always look at an ESG quality score. And what they found in looking at how it was implemented – well, it wasn’t always.
And then you have another kind of greenwashing where managers are, through the name or through high-level claims, insinuating that there are some good ESG characteristics. But they’re not backing up those claims with either good arguments or substantial details.
And then last, but not least, if we’re going to be skeptical about managers and their intent, we need to bring the same level of skepticism to allegations of greenwashing, because not all allegations are greenwashing. Sometimes people will look at a fund that calls itself sustainable and say, “Well, that’s not a sustainable fund.” That’s just a matter of preference.
Would that extend to a sustainable fund with a holding in, say, ExxonMobil, because the fund can say it engages with a company?
Somebody could have a sustainable fund that does deliberately invest in companies that need to change and try and use their power as an investor to drive change. Arguably, that’s the sort of fund we need the most. Because if everyone just creates portfolios of companies that are already good, that’s not actually going to get us to net zero. That doesn’t actually reduce carbon emissions.
We all need to allow for the fact that different people can take different approaches. And maybe we should do a little less judging and maligning of people who are taking different approaches. That might be healthy.
