“Greenwashing” — or making misleading claims about the environmental benefits of a product, usually bonds — has garnered a lot of attention of late, especially as socially responsible investing took a hit when private equity baron and impact investing maven Bill McGlashan, former CEO of investment firm TPG, was charged in the Operation Varsity Blues scandal that has rocked the U.S. elite college and ultra-wealthy worlds (McGlashan denies involvement).
Though there are firms that grab up so-called “green bonds” without much research, managers we spoke to — an asset management firm portfolio manager, a bank asset manager and a director of a nonprofit that focuses on SRI — all say they know greenwashing exists, but note it can be avoided by doing the necessary homework.
Steve Liberatore, portfolio manager of TIAA Investments’ multibillion-dollar fixed income team, noted that the firm has been in SRI for decades.
“We’ve been buying green bonds before they were labeled as ‘green bonds,’” Liberatore told ThinkAdvisor.
He adds that his group “doesn’t care if a security is labeled a ‘green bond,’ we focus on the underlying use of the security. We get impact metrics.” And they dig down to see how the environment is benefiting from these bonds.
“The concept of greenwashing is negative, not only for issuers but for investors,” he says, adding that “green” is not an SEC-trigger word, so anyone could issue a so-called green bond without really being one.
Therefore, bonds bought by TIAA don’t need to be green bonds, per se. He notes that with the nature of fixed income, the firm has the ability to control how assets are utilized and what outcomes are derived. Its size also allows TIAA to have input into the issuer product. “It’s a unique characteristic of the fixed income market,” Liberatore says.
“Firms need to focus on how dollars are being used,” he says, adding investments must have a disciplined approach to reporting. “We’ve looked at plenty of transactions but when we were unable to get the impact reporting,” they walked away.
Liberatore says there are three main reasons that advisors remain reticent about impact investing: beliefs that the strategy sacrifices performance; still isn’t mainstream; and, at least with fixed income, many believe it can’t make a difference. Yet “it provides an opportunity to speak to a client on a holistic level … it gets away from raw numbers, and asks, what are you passionate about?”
Catherine Banat, RBC Global Asset Management’s director of U.S. responsible investing, agrees, and says there is “a gap between what clients want and what advisors are comfortable doing or informed about.” She says there’s two ways to looking at impact investing: There’s a “value” component as well as a “values” aspect, and they are easy to confuse in the marketplace.
The difference, she explains: Say an advisor is looking at a tobacco company and needs to determine if there is “contingent liability,” that is, the danger the company could be sued. “You may decide that incremental risk or that event risk is too uncertain to evaluate value,” she told ThinkAdvisor. “That’s the value discussion.”
However, a values component would be a cancer-oriented foundation not wanting to invest in tobacco companies because it “is not consistent with their mission,” Banat says.
Her group digs into the prospectus on a loan level. “We build fixed income portfolios evaluating each loan,” she explains. “Most fixed income managers look at security-level information; we look at loan-level information.”
She notes that “some prospectuses are clearly earmarked for green projects, but sometimes [they] are too vague about use of proceeds,” which her group avoids.
For fixed income, RBC focuses on a values approach, Banat says. That is, they work with “underserved communities that we define primarily as low- to moderate-income communities and families” where they will buy college bonds, affordable housing bonds or other targeted bonds.
“By being a buyer in the marketplace we help to create a fair market price, as well as a liquid market,” she says.
A Gentler Route
Taking socially responsible investing a different direction is Ethan Powell, CEO of Impact Shares, which is a 501(c)(3) nonprofit exchange-traded fund platform. Powell, who previously was in M&A as well as a hedge fund, designed his firm to work with other no-profit organizations such as the NAACP and YWCA, which give their stamps of approval on companies they believe follow their organization criteria. Impact Shares operates and distributes the funds on behalf of the social advocacy groups, Powell says.
This system makes it simpler for advisors because they can rely on investing that is aligned with various nonprofit group goals, he says.
One typical problem for advisors may be if they select, for example, Walmart for an ESG investment because it uses solar panels on every distribution center, but the investor doesn’t like the store’s labor practices, Powell explains. By leaving it to organizations like NAACP to determine if a firm lives up to its criteria — for example, if GM is working to advance minority empowerment — it provides advisors a stronger and less complicated client discussion.
“Our goal is to have a platform by which every social issue is represented by a separately investable fund,” Powell explains. “So an advisor can say, ‘Here’s a list of three dozen social advocacy groups. Do you want to align your capital with the American Heart Association for heart health, or Habitat for Humanity for affordable housing or the NAACP?’” This system, he says, makes it less likely investors and advisors will get caught in “greenwashing” schemes.
That said, he believes that in five to 10 years “we’re no longer going to be talking about ESG strategies per se. It’s really going to be another axis on the risk/return graph, a three-dimensional graph, where every investment has some sort of social implication, where investors will say, OK, this is my risk-return profile for this allocation and this is my expected impact.”
— Related on ThinkAdvisor:
- What’s the Score With ESG Investing? You Have to Dig Deeper
- Boomer Men Like Sustainable Investing, Too: Morningstar