"Businesspeople, being people, like to feel they are doing good," the dryly witty voice of The Economist quipped some years ago.
Moral philosophy and human psychology are outside of this newsletter’s remit. But I’ll go ahead and make the claim here that retail investors, being people, share this trait. For them, investing sustainably has been offered as a way to feel they are doing good.
That said, how do these well-intentioned people know their investments are in fact producing the outcomes they hope to see; those that would justify the feeling they’re doing good? And, as "ESG" makes its way into the right-wing lexicon of base-riling phrases such as "critical race theory" and "fake news,” how can the average retail investor best make sense of ESG products?
Retail investors — non-professional individual investors who buy and sell securities — account for 25 percent of listed equities trading volume. If you include those who are able to employ an adviser, the share of the pie grows. I don’t usually write about retail, but it’s worth taking a closer look given a) the category’s sizable share of the current market, and b) it’s a constituency that has produced much of the demand for the ESG products we’ve seen marketed in response.
Critiques from within the sustainable finance profession are numerous, and are more often than not valid. But, critiques aside, the common goal is to see this space succeed and thrive — for people and the planet and, yes, profit.
Explaining ESG to your neighbor
In San Francisco, I am disproportionately surrounded by folks from the fortunate half of the population who own stocks. Most in my social milieu aren’t finance people, but the majority are interested in trying to live out their values as they relate to sustainability. Since ESG hit the headlines, I’ve been getting a lot of questions. Given the marketing education many of my peers have gotten on what ESG is or does, my answers are often received as a bummer.
We’re all constrained in our capacity to learn about the world we operate in. We know a little bit about a lot of the things we need to, and sometimes a lot about one thing. It’s not surprising many retail investors are unsure as to what sustainable investing is and how ESG products fit into that goal.
We need to bring data up to the surface so people can make their own decisions.
Reliable information on sustainable investing is "disparate at best and consistently confusing," Zach Stein, co-founder of Carbon Collective, an investment manager focused on climate solutions, told me. "How can we really expect people to make sense of this space?"
The investment industry itself doesn’t have clarity on what an ESG score is for, and the boss of MSCI, the largest ESG ratings provider, has said that "many portfolio managers" don’t even understand what an ESG rating indicates. If that’s the case, how can retail investors possibly be expected to make sense of what they’re buying into?
Back to Stein at Carbon Collective: "We need to bring data up to the surface so people can make their own decisions. The ESG industry puts out this middle layer — like ratings and scores — but that doesn’t serve what ordinary investors are looking for."
Or, as Trenton Allen, CEO of financial advisory firm Sustainable Capital Advisors, told me, "It has to be clearly about the impact of an investable dollar, not just the scores and rankings.”
A better ESG education
As United States Securities and Exchange Commission Chair Gary Gensler has metaphorized, if it’s easy to tell whether milk is fat-free by looking at the nutrition label, sustainability-focused funds should provide similar clarity. As such, the SEC has been homing in on ESG products, with multiple rules proposed and investigations underway.
The SEC declined to comment for this story, but the agency pointed me to its ESG Funds Investor Bulletin, which states: "While many different private ratings based on different ESG factors exist, they often differ significantly from each other."
The information is helpful, but, realistically, most retail investors don’t keep abreast of content put out by the SEC’s Office of Investor Education and Advocacy. Retail investors are shoppers. Like the milk you see at Whole Foods that claims "this milk fights climate change," the average consumer will digest the marketing message, look at the (unregulated) "carbon neutral certified" stamp and put that milk in the basket, leaving the climate-laggard milk on the shelf.
There are parallels in ESG fund messaging to the marketing of that climate-championing milk. But as I went back to find some, I saw a telling example of change. When I wrote on a similar subject some months ago, I cited BlackRock — the largest purveyor of ESG funds and of ETFs generally — as describing ESG investing as "Investing in progress," among other ethically charged language. The framing has since changed.
Rather than being described as an investing method that produces a certain outcome with your ethical convictions in mind, BlackRock’s revamped definition is refreshingly accurate:
"Sustainable investing is the practice of analyzing a company’s environmental, social and governance (ESG) risks, as well as assessing its opportunities and progress, using ESG data and fundamental insights, to inform the allocation of capital."
Looks to me like a small bellwether of a sustainable investing space with less greenwash (SEC investigations, of course, help).
There are also more tools in the market that are bringing increased — and highly accessible — clarity from trusted messengers. For example, Morningstar's new Investable World platform, which the firm's director of equity research for ESG, Adam Fleck, told me can "help clients make their own decisions based on their preferences around the delineation between impact and risk from the ESG perspective."
So, as multitudes of sustainable finance professionals descend on New York City for Climate Week, where are we "getting it done" on ESG education? I’ll leave the myriad announcements made this week to try to answer that.
Many marketing materials for ESG products clearly need an overhaul. But despite backlashes to ESG, and dizzying backlashes to the backlashes, interest from retail investors isn’t waning. As the Malcolm X quote goes, "education is the passport to the future."