‘Wild West’ of ESG Ripe for a Crackdown, Veteran Investor Says

(Bloomberg) -- There’s a veteran of ESG investing who can’t wait for tougher regulations to stamp out the false claims by fund managers in the $35 trillion industry he helped champion.

Matt Patsky, who runs Trillium Asset Management, first started hunting for environmental, social and governance investments back in the 1990s, long before most money managers were even thinking about ESG. He now estimates that only a fraction of today’s ESG assets are bona fide sustainable investing.

Efforts by regulators to rein in money managers’ ESG claims are the “best thing to happen to the industry in years,” Patsky, whose Boston-based firm manages $4.8 billion, said in an interview. “It brings scrutiny to an area that’s become the wild west, where fund managers have discretion to slap ESG labels on anything.”

Patsky, whose main fund returned almost 20% through August, says money managers who tell clients they’re doing ESG investing without rigorously pressing companies to do less harm to people and the planet aren’t the real deal. He hopes that stricter regulations will thin out the herd. The 58-year-old is dismissive of fund managers who only use ESG data, which he says is flawed, to claim they’re doing sustainable investing.

For a roundup of ESG stories: See NI ESGDAILY.

After years of unfettered growth, the ESG industry now faces new regulations. In Europe, the Sustainable Finance Disclosure Regulation took effect in March and is now forcing money managers to start scaling back inflated ESG claims. The anti-greenwash rulebook is the most ambitious of its kind in the world, but U.S. and Asian regulators are catching up amid mounting concerns about funds exaggerating their green credentials.

Patsky, who introduced the world’s first “green-chip” index of socially-responsible companies in 1994, estimates that of the $35 trillion that the Global Sustainable Investment Alliance says is parked in sustainable investments, less than $1 trillion is in “real” ESG. Of that, $500 billion is managed in Europe and as much as $300 billion is in the U.S., he said.

Such warnings are becoming more frequent as the mood around ESG shifts. Some industry insiders have leveled allegations of greenwashing against their former employers. And asset managers are starting to review how they label and sell ESG funds to avoid being named and shamed. U.S. and German regulators are probing Deutsche Bank AG’s investing unit after its former sustainability head accused it of ESG “propaganda.” The asset manager, DWS Group, says it did nothing wrong. 

While sustainable investing lacks definitions and is based on inconsistent benchmarks and poor data, Patsky says he’s glad that more attention is being paid by business and finance to issues such as gender inequities, human rights abuses in supply chains and climate change.

To be a credible socially responsible investor, Patsky says managers need to first be skeptical toward ESG-ratings data, which he claims is riddled with errors. Those issues make passive ESG investing impossible, he added.

Patsky says he takes issue with a strategy that now accounts for the lion’s share of sustainable-investing assets called “ESG consideration.” The label means money managers take ESG risks into account in their investing models, but don’t necessarily change their investments as a result. Some $25 trillion is in this strategy, according to GSIA. 

“That shouldn’t even be labeled ESG because it’s not integrating sustainability in a thorough way,” Patsky said.

His check list for being a serious ESG investor includes pressuring corporate executives to change their companies’ behaviors, filing shareholder resolutions and voting on those filed by others. 

“Unless that happens, most of ESG will largely be ineffective in quickly addressing systemic issues,” Patsky said. 

Trillium itself has pressed companies such as Johnson & Johnson and Starbucks Corp. on issues including performing racial audits and reducing plastics use. The asset manager was purchased last year by Australia’s Perpetual Ltd.

Trillium was founded in 1982 by the late responsible-investing pioneer Joan Bavaria. Its main fund, ESG Global Equity, returned 19.3% through August, compared with the 16.2% gain of its benchmark, the MSCI ACWI Index, Bloomberg data show.

©2021 Bloomberg L.P.