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Not everyone is jumping on the ESG bandwagon 

Not everyone is jumping on the ESG bandwagon  35

By Josh Gregory, CEO and Founder of Sugi  

2020 has undoubtedly shone a spotlight on sustainability. Investment into green tech and cleantech startups has already reached an all-time high. Between the climate crisis and the pandemic, interest in doing better for the planet has skyrocketed in all aspects of our lives, including in finance.  

Sustainable – or green – finance is having somewhat of a moment of late. And it’s easy to see why. There is a wealth of evidence suggesting that companies with good environmental, social and governance – or ESG – practices will outperform their counterparts without.  

However, not everyone is jumping on the ESG bandwagon. While asset managers and institutional investors are indeed clued up on the benefits of sustainable investing, retail investors are lagging behind. But it’s not a lack of interest that’s stopping them. Research by BlackRock shows that over 75% of people want to engage in impact investing, but only a small proportion of investors actually follow through with it.  

One of the main reasons is a lack of clear information. Currently, sustainability – or ESG – ratings are the main source of information available for retail investors. However, these ratings are not designed with retail investors in mind. Sustainability ratings are designed for asset managers and institutional investors who typically have access to other sophisticated portfolio dashboards and data when building portfolios. They are not designed for those who research their investments, say, on their laptops themselves.  

Sustainability ratings are created using a complex methodology. Put simply, a sustainability rating scores a fund out of five. It’s created by averaging the ESG scores of the underlying companies in the fund and comparing the fund with others in the same industry group. A different set of factors is used depending on the industry, meaning there is no way to compare ratings across industries.  

On top of this, sustainability ratings combine the three pillars of “E”, “S” and “G” with a bespoke set of weighting for each factor, determined by the agency that creates the rating. This in itself is a highly subjective methodology. It effectively means an investment may score well for social and governance factors, for example, but poorly on environment – but still receive a good rating. While some funds show separate scores for ‘E’, ‘S’ and ‘G’, delving into details on what they mean is nigh on impossible.  

Finally, and perhaps most importantly for retail investors, sustainability ratings are a financial risk metric. This means that they look at a company in the context of ESG factors and analyse how it is likely to perform as a result. For example, an ESG score won’t help someone understand a company’s carbon footprint, water usage or waste. Rather it will indicate how far these factors are likely to affect the company’s financial performance compared with other stocks in its sector. While this is obviously important, most retail investors want to invest for the good of the planet. They therefore want to know how a company is performing against their own environmental or ethical issues instead. 

Ratings aside, sustainable investing is a complex beast. Generally speaking, it’s full of confusing language, jargon and a general lack of transparency. Retail investors are also concerned about greenwashing – and rightly so, given the muddy waters. While some companies publish annual impact reports, unless investors have time to trawl through them individually, it can be hard to differentiate between real impact and marketing spin. This results in a lack of understanding and confidence among retail investors to engage in green investing. 

This is why we’ve launched Sugi. Sugi is a completely new way for retail investors to engage with green investing. For the first time, retail investors can access personalised carbon data about the stocks, funds and ETFs they hold and compare them with industry averages and similar investments.  

Users link their investment portfolios through Open Finance technology, which enables us to personalise the experience and information. Behind the scenes, the raw impact data is sourced from S&P Trucost, a world leader in environmental data and analysis with world’s largest impact data set and over 100 environmental key performance indicators.  

Most importantly, Sugi is designed specifically for retail investors. Through Sugi, retail investors have access to relevant, objective and easy-to-understand green information, creating many more ways to engage with green investing. 

We believe in the importance of sustainable investing for everyone – not only so retail investors can align their investments with their values if they wish, but to help create a sustainable future. With the right information, retail investors can take control of their impact, as well as their finances, and make a real difference.  

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