Too much regulatory oversight seen threatening ESG growth

As the global ESG investing space ponders the possibility of universal standards and definitions to help add more structure and uniformity, it might be time to start worrying about oversight becoming too strict in a part of the wealth management industry that is far from black and white.

“Overly rigid, clear standards could be weaponized, and we may need to be careful what we wish for here,” said Cameron Brandt, director of research at EPFR.

Speaking Tuesday during a webinar about what's driving the growing momentum in ESG investing, Brandt and his fellow panelists acknowledged the challenges facing a category that is in desperate need of universal guidelines and structure from regulators, product providers and researchers.

Responding to a question about greenwashing, in which an investment’s ESG status is exaggerated, Brandt cited a Chinese developer claiming a bond issuance qualified as ESG because the proceeds were being used to retire existing debt that wasn’t as ESG-friendly.

“No doubt there’s some greenwashing going on,” he said.

Ryan Nauman, market strategist at Zephyr, said a lack of comprehensive data and clear ESG definitions are among the obstacles that make it difficult to identify greenwashing.

“It is getting better, but there’s still gaps in the analytics,” Nauman said. “The ratings right now are very subjective, and a lot of that is due to the lack of global standards. ESG is so popular right now that a lot of funds can just put sustainable in the name, which is why it’s very important for fiduciaries to look under the hood.”

Michelle Kwek, head of research in Asia at Informa Global Markets, said “investors are becoming a little more savvy” when it comes to watching out for greenwashing tactics.

However, she said, the challenge remains that “there’s not a global standard and framework for ESG.”

While the industry is still a long way from establishing global or even country-level ESG definitions and standards, Brandt warned against letting concerns over greenwashing drive too much regulatory structure around the category, which he thinks might thrive best with more fluidity.

For instance, on the matter of getting more ESG funds approved for defined-contribution retirement plan menus, Brandt said more regulatory structure could be a hurdle because oftentimes the “implied benefit of many ESG funds is nonmonetary,” which could raise a fiduciary challenge for retirement plans designed to generate and maximize retirement savings.

“Some of the less-defined elements of ESG are an issue,” he added.

While Brandt said that there's no sign of common standards in the current “regulatory Tower of Babel,” he does see continued momentum for the ESG space.

“There’s more prosaic reasons for people getting involved beyond the possibility of feeling good,” he said. “A lot of the involvement we’ve seen is somewhat more defensive, and a lot of the money is still coming from baby boomers, not the millennials, and they are doing this mainly to get downside protection.”