Work by Candice Tait, a PhD graduate in finance from the University of Auckland, looked at responsible investing operates across different markets and the impact of private equity on businesses and sustainability.
It included shareholder pressure on ESG issues.
She said she surveyed 105 individual investors across 11 private equity and venture capital firms in New Zealand, the first study of its kind.
“Appetite for responsible investing is pretty strong, around 91% of investors are familiar with the principles of responsible investing, and 73% expect the funds to fully integrate ESG into investment decisions.”
But she said there were high levels of scepticism about greenwashing. More than three-quarters of the investors she talked to were worried funds might be overstating their ESG credentials, compared to a result of 50 percent in a Mindful Money survey of retail investors.
Only one in five investors felt they had comprehensive visibility of how a fund was performing on ESG.
“It seemed like there was quite a bit of misalignment between what the fund was producing and what the investor was receiving. “
Tait said there was also a gender divide.
“Female investors place more emphasis on environmental and social issues than men. And because there are so many more male investors than female, the weighting of the female perspective on sustainability isn’t being reflected in decision-making. That opened up a can of worms for me,” she said.
“Women in the sample consistently showed stronger ESG awareness, prioritised the environmental and social issues more highly, and they had more confidence that ESG integration would help you understand risk of reinvestment. The only issue with my research is that of the entire sample, women only held 16% of that.
“So it reflects the demographics of private capital generally. But what's interesting there is male preferences were sort of driving allocation decisions disproportionately. “
She said bringing more women into private capital decision-making could help bridge the gap, and better education across the board would help.
“Because ESG awareness was quite literally the single biggest predictor of ESG engagement in my data, regardless of gender.”
The research also raised issues of transparency for investors.
“We’ve got investors who want to engage with ESG, but can't actually see what the fund is doing about it. And fund managers have quite a big opportunity here to substantially improve their disclosure and meet genuine investor demand.”
There could be problems accessing the right data, she said.
“I worked for a private equity firm in the South Island. And when we were pulling together ESG data, there was an issue around actually getting robust data….maybe times have changed in the last few years, but I'd say the consistency across data points is not there yet.
“Even when I was doing my research, it was really hard to gather data from like really big software tools that was all consistent, that was accurate. Climate data is not accurate either. Sometimes there's estimates in there. So it is really tricky.
“And if you think about it on a portfolio level, if you go to a a portfolio company that makes wine and you ask (them to pull together an ESG report and they might not even have the skill set to do that….it’s a genuine issue… a lot of companies don’t have the resources to pay for someone who’s got the expertise to pull that data together.”
She said the broader market shift from active to passive investing changed the tools that investors had to influence ESG decisions. Passive funds could only rely on engagement and there was no evidence it had results, she said.
“A passive fund has to own whatever's in the index, it can't sell out of a company on ESG grounds, right? It has only the tools such as voting and shareholder meetings and then engaging privately with management.
“And we now have this huge concentration where BlackRock, Vanguard, et cetera, they own like a huge percentage of S&P 500 globally. So as more money goes passive, more of the ESG influence in public markets sits with those three firms, those big BlackRock and Vanguard …One of the first chapters I looked at in my research looked at the influence of climate change shareholder proposals in the US. And essentially, I found no significant improvement in stock performance, financial performance or even environmental ratings for up to two years after successful engagement.”
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