Cover (Photo: Getty Images)

Janet Shum, Asia Pacific Sustainable Investing Specialist at Citi Private Bank, sheds light on how to size up sustainability claims and ensure your investments live up to your values and objectives

As sustainable investments have grown in popularity, so has the number of organisations eager to play up sustainable attributes of their businesses. When their claims are exaggerated—or meant to distract from other unsustainable practices—the tactic is known as greenwashing or variations on that theme: social-, rainbow-, or ESG competence-washing.

These terms refer to unsubstantiated or misleading claims about environmental benefits, social impact, contribution to the UN Sustainable Development Goals, and subject matter expertise, respectively. And they can make investors feel skeptical about sustainable investing. 

Below Janet Shum, Sustainable Investing Specialist for APAC at Citi Private Bank (CPB), outlines what to look out for when selecting investment opportunities to meet your sustainability objectives. 

See also: Women of Worth: A Series Celebrating and Supporting Financial Empowerment 

Where and how should I begin the evaluation process?

First and foremost, investors need to seek transparency in their investments and investment managers. In the materials you read and the discussions you have, be alert to poorly defined information on investment processes, opportunities that sound too good to be true, and vague assurances rather than verifiable answers to your questions.

Once you do this, you can apply multiple lenses to evaluate the likelihood that an investment or investment manager will further your sustainability objectives. At the company level, the two key evaluation components include:

What a company does: For companies in sectors such as renewable energy, electric vehicles and financial inclusion, one may feel comfortable that by the very nature of what the company creates or provides, they are sustainable.

How a company does it: Businesses that employ strong sustainability practices will identify the material ESG factors that impact their business and stakeholders; develop appropriate policies and practices to manage them; and set ambitious targets for improvements. At the same time, they will assess how their day-to-day operations impact the environment and community and take actions to minimise potential negative impact. Transparency is a critical component of companies with high sustainability standards.

See also: This Sustainability Advocate Is Helping a Family Office Lead the Way in ESG

Are ESG scores good indicators of a company’s sustainability performance?

Sustainable investment options have proliferated in recent years, but not all are created equal. ESG scores are a great starting point to understand a company’s ESG attributes, but they do not tell the full story; a deep fundamental analysis of a company or a portfolio manager’s investment processes is therefore essential.

One of the complications of using ESG scores is that each ESG data provider and/or rating agency has its own methodology, so it is important to consider how the scores are derived and if the scores accurately reflect an investor’s sustainability objectives. The correlation among different providers’ ratings is low partly due to different data sources, performance metrics, and weightings.

Take, for example, an electric vehicle manufacturer with poor labor practices—one rating agency may emphasis the environmental impact, while another may prioritise human rights or some other factor. This is why we advise investors to familiarise themselves with a rating agency’s priorities to see if they align with their own.

See also: Young Women Lead Climate Change Activism, But Who Sets the Policies?

Do investment managers “wash”?

I would have to say that “washing” to one investor might not be to another. For example, for one investor, values-based exclusions are sufficient, for another it is not enough. But to be clear, certainly “washing” with intent does exist.

When evaluating an investment manager, consider their level of experience, track record, and years in the sustainable investing space. Arm yourself with a list of questions, such as:

1.     How do they define sustainability and how is it incorporated in the portfolio construction and investment decision process?
2.     What exposure threshold do they set for exclusionary or thematic approach?
3.     Do they favour any sustainability factor while compromising another? 
4.     What is their record in proxy voting and active stewardship on ESG matters? 

For impact investments, which are designed to deliver intentional, measurable, and incremental environmental and/or social impact, always seek proof of positive change. Look for evidence that shows what positive outcome is occurring, who is experiencing the outcome, how much of the outcome is occurring and what is the manager's contribution in scaling the impact.

Lastly, don’t let down your guard; it's important to continue to review how the manager monitors and reports their progress against their sustainability objectives.

In the third and final Ask the Expert instalment, Shum will spotlight areas of growth she is seeing in the sustainability space. Missed the first instalment? Read up on how to start building a sustainable investment portfolio.  

This Front & Female article is created in partnership with Citi Private Bank for our Women of Worth series celebrating and supporting independent women to pursue their worth. Join the Front & Female community by subscribing to our newsletter and following #frontandfemale

About Citi Private Bank: 

Citi Private Bank is dedicated to serving worldly and wealthy individuals and families, providing customised private banking across borders. With more than $600 billion in global assets under management, the franchise serves clients in over 100 countries. Citi Private Bank helps clients grow and preserve wealth, finance assets, make cash work harder, safeguard assets, preserve legacies, and serve family and family business needs. The firm offers clients products and services covering capital markets, managed investments, portfolio management, trust and estate planning, investment finance, banking and aircraft finance, as well as art and sports advisory and finance. Learn more

© 2022 Tatler Asia Limited. All rights reserved.