SMITH BRAIN TRUST – Most investment decision making is profit driven. But integrating ESG (environment, social and governance) factors into investors’ research and decision making has gained momentum over the last couple years. As index providers vie with one another to provide the benchmarks needed to meet demand for sustainable funds, the quick expansion of this industry has prompted regulators and legislators to take notice.
This activity is problematic. "ESG ratings may give investors a false sense of security, but the reality is that it's a new industry built on data that is optional or voluntary – many investors may not realize that the data isn't audited,” says Maryland Smith’s Russell Wermers.
The stakes for improving transparency are rising. Bloomberg Intelligence has projected global ESG investment to rise from $17.1 trillion in 2020 to more than $53 trillion by 2025, and to comprise more than one-third of projected total assets under management. Wermers, Dean’s Chair in Finance and Director of the Center for Financial Policy (CFP) at the University of Maryland’s Robert H. Smith School of Business, will further discuss the issue as part of a virtual panel presented by the CFP and Maryland Smith’s Center for Social Value Creation (CSVC): “What it Means to Be Green,” at 11 a.m. Monday, May 17, 2021.
Joining Wermers: Hilary Jochmans, of Jochmans Consulting and founder of Politically In Fashion; Kirti Poonia, head of Okhai, a sustainable fashion brand subsidiary of Tata Global; and moderators Kristen Fanarakis, CFP senior consultant and founder of the American-made luxury fashion brand Senza Tempo and CSVC Director Nima Farshchi.
Wermers, whose recent research explores how climate impacts investment decisions, says “most ESG models also are very opaque in how, exactly, they score the companies."
It’s the opacity of the models and imprecise way many of the factors are defined broadly, especially the use of “sustainability” and “organic”, that drove Jochmans’ advocacy work calling for the Federal Trade Commission to update its Green Guides, which are designed to help marketers avoid making environmental claims that mislead consumers. The guides, first issued in 1992 and most recently updated in 2012, apply to marketers, manufacturers, auditors, and wholesale and retail sellers, and is particularly critical to the fashion industry – the second largest consumer of water globally, after agriculture, using 10% of total industrial supply, and an industry that experts estimate will worsen in terms of its environmental impact by 2030 due to a growing, emerging market demand.
“Fashion is often viewed as frivolous or unimportant, but it’s a $1.5 trillion industry whose actions are anything but inconsequential,” says Fanarakis, who worked more than decade on Wall Street in foreign exchange trading before founding the American-made luxury fashion brand Senza Tempo. “And last year has proven to be a case study or cautionary tale exposing the flaws in the burgeoning ESG industry.”
She refers to ESG’s social component as increasingly relevant in the fashion world. “Just two weeks before UK company Boohoo was accused of poor working conditions and various labor violations, its AA rating was reaffirmed, and it was ranked in the top 15% of funds which qualified it to be included in some ‘sustainable funds’.”
ESG investing “has taken off over the last few years, but we’re all struggling with what sustainability, being green or eco-conscious even means, that it’s become so overused, especially in the fashion industry.” Fanarakis says.. “Even some media outlets are starting to react. Allure magazine just banned the use of certain sustainability buzzwords around product packaging.”
Get more, related insights by registering and joining the free webinar. This event is part of the CFP's Second Objective Function series, which focuses on ESG topics. The next event in this series,set for May 25, will be on Permanent Instability: Climate Risk to the Financial System.
GET SMITH BRAIN TRUST DELIVERED
TO YOUR INBOX EVERY WEEK
- Smith Brain Trust
Media Relations Manager