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The Big Exchange

Why should retail investors demand transparency?

by Nick Jardine, Curation Corp

The increasingly conscious consumer demands transparency. There’s a need to know where the raw ingredients for your morning coffee or cheeky afternoon bar of chocolate came from. It’s becoming a requirement to learn who stitched the label onto your new sweater and the carbon footprint of your latest impulse buy.

This demand for clarity and disclosure is a good thing. It holds corporates accountable, at times forcing them to confront issues such as deforestation and unethical labour standards head-on. It’s also something retail investors could think about when putting their money to work.

The growth of investing according to environmental, social and governance (ESG) principles has been a major force within asset management in recent years. According to figures from Morningstar, assets in ESG-oriented funds across Europe hit £800bn in 2020, more than double the figure from four years ago.

This, again, is a huge positive. Investors are increasingly demanding access to products excluding problematic industries such as fossil fuels and tobacco. Additionally, asset managers overseeing products without an ESG mandate are seeing the value in promoting sustainable principles. In 2020, Larry Fink, CEO of the world’s largest asset manager BlackRock, wrote that sustainability was his firm’s “new standard for investing”.

The rise of this form of investing has not been without problems, however. Different fund managers use varying methodologies to assess companies on environmental, social and governance grounds. The result can be firms scoring high with some managers — and getting included in portfolios — while ranking lower with other managers, thus facing exclusion.

For investors, this variance can be problematic. Disparities between ESG screening processes has recently meant some retail investors have been, unwittingly, exposed to companies with severe governance failures.

This brings us back to transparency. While funds disclose their holdings frequently, investors should demand to see information made available about how managers are addressing sustainability and the methodologies used to score portfolio companies on these grounds.

The matter doesn’t stop there, however. Managers should also be requested to put greater pressure on portfolio companies to make appropriate sustainability-related disclosures regarding their businesses.

A recent survey of companies by non-profit CDP found disclosures around climate risk data were twice as likely when investors actively pushed for them. Fink also addressed the issue in his annual letter to CEOs, noting sustainability disclosures are in the interest of both companies and their investors. Firms shouldn’t wait for regulators to mandate disclosures; they should be making them right now.

The additional level of clarity and transparency provided by making such information available allows investors to make more informed decisions regarding what companies they support. A recent study conducted by France’s central bank, for example, found mandatory climate reporting led to French investors cutting stakes in fossil fuel companies by 40%. The study also showed divestments of this nature had little impact on investment performance.

Such decisions, however, are only possible when a greater level of transparency is provided.

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