Evaluating sustainable investments

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When seeking out potential sustainable investment opportunities, it is key to be able to separate the wheat from the chaff. 

As sustainable investing has gained in popularity, so too, has the number of companies and organizations eager to play up the sustainable attributes of their business or investment opportunities. 

This tactic can take many forms and is sometimes known as greenwashing, social-washing, rainbow-washing or Environmental, Social, and Governance (ESG) competence-washing.  

Examples of “washing” include omission of material information, provision of misleading information, and over-exaggeration of sustainable aspects of a business or investment strategy, among others. 

These declarations, often unsubstantiated or misleading, can make investors feel skeptical about investing in sustainable strategies. 

Recent research by the Association of Investment Companies’ ESG Attitudes Tracker found that 63% of surveyed private investors were concerned about greenwashing in 2023, up from 48% in 2021.1 Hence, holistic evaluation with a balance of both breadth and depth is critical to mitigate greenwashing risks. 

How can an investor start the evaluation process? 

 

First, it is important to seek transparency about the potential opportunities. 

Be wary of poorly defined, or generally vague ESG-related terms, policies and promises, especially when the financial and ESG-related returns and impacts sound too good to be true. Be mindful of any vague assurances that might be offered, instead of verifiable and empirical answers to questions.

When evaluating a company, scrutinize two main components – the “what,” and the “how”. 

Ensure that companies in an investment portfolio who peddle themselves as “sustainable” are transparent about the following tenets:

1. What a company does

For companies in inherently sustainability-linked sectors such as healthcare, one might feel compelled to label the business as “sustainable”. However, this might not be the case after looking deeper into what products or services they offer. 

For example, while companies that offer access to affordable quality healthcare services to underserved communities fall under the scope of sustainable investing, those that focus purely on cosmetic procedures, do not.

2. How a company does it 

Businesses that are committed to strong sustainability practices identify quantifiable ESG factors that impact their business and stakeholders, as well as develop a risk mitigation plan and set ambitious targets for growth and improvement. Often, these companies also assess the day-to-day impact of their operations on the environment and community and take actions to prevent any negative impacts.

Going beyond standard disclosures

 

One tool to evaluate portfolio companies is their ESG scores. While exact ESG rating methodologies differ among rating bureaus, the most comprehensive usually measure a company’s performance on and management of material ESG risks, opportunities, and impacts, informed by a combination of company disclosures, media and stakeholder evaluation, modeling approaches and business engagement.2

This is a great starting point of reference, though it may not paint a full picture of a company’s overall sustainability attributes. 

There are over 600 ESG ratings agencies and data providers globally3, each with its own methodology. 

This complicates attempts to make standardized comparisons between companies based on ESG scores alone. When selecting data providers, consider how exactly the ESG scores are derived, calculated, and aggregated. Moreover, assess whether the scores and data accurately reflect specific sustainable investing objectives.

Note that what may be seen as “washing” to one organization or investor may be different from another depending on their objectives. Questions to consider include: 

  1. How does the company or investment firm define sustainability? 

  2. How is sustainability incorporated in the portfolio construction and investment decision process?

  3. What is the exposure threshold set for exclusionary and/or thematic approaches?

  4. For impact investments, is there proof of intentional, measurable, and incremental positive change?

  5. Are any sustainability factors favored over others? Are there any compromised factors that have been ignored or sidelined?

  6. What is the company’s record in proxy voting and active ESG-related stewardship?

Finally, investors should not let their guard down after making their investments. Continually review how the organization or investment manager monitors and reports their progress against their sustainability objectives, to ensure that the investment strategy remains aligned with intended goals.

KEY TAKEAWAYS:

 

Be wary of green and other ESG-related acts of “washing”. Due diligence, both broad in scope and granular in detail, is imperative in evaluating a company’s commitment to and success of sustainability-related initiatives.

Delve into the “what” and “how” of a company to assess its commitment to sustainability.

ESG scores are a great starting point to assess a company’s ESG commitment and competency but cannot paint a complete picture. A holistic fundamental review of a company is necessary for that.

An investor should ask targeted questions and work with their advisor to obtain accurate and material information about a strategy or company to ensure the opportunities are aligned with both sustainability and financial goals.

 

1  Financial Times: Fear of Greenwashing in ESG Investing has Grown

2  S&P Global Inc. ESG Score

3  ESG Ratings: do they add value? How to get prepared – Deloitte

 

Important Information

Environmental, Social and Governance (ESG) and sustainable investing may limit the type and number of investment opportunities, and, as a result may affect performance relative to other approaches that do not impose similar sustainability criteria. Sustainable investment products are subject to availability. Certain sustainable investment opportunities may not be available in all regions or not available at all. No guarantee is provided regarding the financial or sustainability performance of such products and the products may not meet their investment or sustainability objectives. 

Investment strategies, portfolios and products offered via the Citi Global Wealth Investments’ (CGWI) sustainable investing platform, Investing with Purpose (IwP), meet CGWI’s defined criteria for a sustainable investment. Every sustainable investment on the IwP platform incorporates one or more approaches: Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG) Integration, Thematic, and Impact. 

At CGWI, we define the four approaches to sustainable investing as follows. Socially Responsible Investing (SRI) involves the exclusion of sectors or companies that may not to be aligned with sustainability values or objectives. The investment mandate must explicitly state the intention to exclude certain exposures to such sectors, industries and products based on values-related criteria. 

ESG Integration uses ESG data and metrics to identify investments with potentially attractive risk and return characteristics. Investment mandates will incorporate ESG risks and opportunities that are considered material and integral drivers of investment decisions into their investment process. Managers of ESG integration strategies may directly engage with portfolio companies and / or use their proxy votes to help drive positive ESG outcomes.

Thematic investments access exposure to investments aligned to sustainable themes such as climate change or access to healthcare. Investments seek alignment to sustainable themes through their business lines as demonstrated by their current and future revenue exposures. 

Impact investments demonstrate measurable impact in a particular environmental or social area. Investment mandates not only state intent, but also manage to a desired sustainable outcome by providing measurable environmental and/or social metrics alongside a potential financial return. To be considered ‘impact’, the outcome must be incremental, meaning it would not have occurred had the investor’s capital not been allocated to the investment. 

A single investment product can combine multiple approaches. These approaches may limit the type and number of investment opportunities, and, as a result may affect performance relative to other approaches that do not impose similar sustainability criteria. Sustainable investment products are subject to availability. Certain sustainable investment opportunities may not be available in all regions or not available at all. No guarantee is provided regarding the financial or sustainability performance of such products and the products may not meet their investment or sustainability objectives. Strategies and products must meet certain criteria for sustainable investing to be marketed as such on CGWI’s IwP platform. Investments outside the IwP platform may still consider sustainability criteria in the investment process, such as potential impact of climate risk on investment value.

There is currently no globally accepted framework or definition (legal, regulatory or otherwise) nor market consensus as to what constitutes, an “ESG”, “sustainable”, “impact” or an equivalently labelled product, or regarding what precise attributes are required for a particular investment, product or asset to be defined as such. Different persons may arrive at varied conclusions when evaluating the sustainability attributes of a product or any of its underlying investments. Certain jurisdictional laws and regulations require classifications of investment products against their own sustainability definitions and as such there is likely to be a degree of divergence as to the meaning of such terms. For example, the term “sustainable investing” where used in this disclosure is by reference to CGWI’s internal framework rather than any defined meaning under jurisdictional laws and regulations. There is no guarantee that investing in these products will have a sustainability impact.

There are numerous ESG data providers that evaluate companies on their ESG performance and provide reports, ratings, and benchmarks. Report, rating and benchmark methodology, scope, and coverage, vary greatly among providers. ESG data may not be available for all companies, securities, or geographies and as such, may not necessarily be reliable or complete. Such data will also be subject to various limitations, including (inter alia): i) limitations in the third-party data provider’s methodologies; ii) data lags, data coverage gaps or other issues impacting the quality of the data; iii) the fact that there are divergent views, approaches, methodologies and disclosure standards in the market, including among data providers, with respect to the identification, assessment, disclosure or determination of “ESG” factors or indicators and which precise attributes are required for a particular investment, product or asset to be defined as such; iv) the fact that ESG information, including where obtained from third-party data providers, may be based on qualitative or subjective assessment, and any one data source may not in itself represent a complete ‘picture’ for the ESG metric that it represents; v) the fact that such data may be subject to change without any notice of this to CGWI by the third-party data provider or other source. Furthermore, some of the data CGWI obtain from third-party providers is not obtained directly from investee companies, but rather represents estimated / proxy data that the third-party data provider has prepared using its own proprietary methodologies (e.g. because there is no actual investee company data). Such proprietary methodologies are also subject to various limitations of their own, acknowledging that estimates / proxies are in and of themselves an inexact science. CGWI does not make any representation or warranty as to the completeness or accuracy of any such third-party data (whether actual or estimated), or of data that is generated using this third-party data. CGWI shall have no liability for any errors or omissions in the information where such information has been obtained from third parties or not.

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