ESG backlash could help to focus collaborative engagements, says Insight

The backlash against ESG could help collaborative engagement initiatives to better focus on their targets and outcomes, according to the head of responsible investment research and innovation at £683 billion ($825 billion; €773 billion) manager Insight Investment.

In an interview with Responsible Investor, David McNeil said the investment industry was becoming more sensitive to the anti-ESG backlash when it came to collaborative engagements.

Climate Action 100+, the largest such initiative with 700 members and more than $68 trillion in assets, has been the focus of repeated attacks by Republican politicians, who have called it a “climate-obsessed corporate cartel”.

Financial institutions listed by Texas as boycotters of fossil fuel firms can secure their exit from the list by leaving CA100+ and the relevant GFANZ initiative. House Republicans have also requested a series of documents relating to CA100+ from US pension fund CalPERS and Ceres, one of the founding CA100+ networks, warning that the initiative may be in breach of antitrust regulations.

CA100+ says it is not in breach of the laws and its commitment to following them is evidenced by a weighty disclaimer on its website.

The backlash, McNeil said, “probably means that a lot of these organisations and coalitions will be a lot more specific about their intended outcomes and focus. So it could be a positive if it means that a lot of these coalitions are very clearly focused on what their intended outcomes are and what they’re trying to achieve versus what they’re not.”

Insight is itself a signatory to CA100+, where it has been part of collaborative engagements with Enel, BHP and Pemex, and plans to join other engagement groups. However, it has not signed up to equivalent collaborative groups on human rights or biodiversity.

“We undertake a routine stocktake of our collaborative engagement initiatives and where and how we engage – considering the intended outcomes and likely impact of each,” McNeil said.

When evaluating initiatives, the manager looks at alignment with its investor asset base and net zero or other ESG targets, as well as where it can have the most impact on its ESG priorities.

“It’s better to be engaged and closely involved in the right initiatives rather than making a wide range of commitments ‘on paper’ alone,” he added.

A tale of two tiers

Insight was one of the first managers to raise concerns over quality issues in the ESG-labelled debt market when it revealed in July 2021 that it was rejecting around a quarter of all labelled bonds as not meeting its sustainability criteria.

The manager uses a three-tier system for evaluating the sustainability of labelled bonds, with bonds given a red, light green or dark green rating. Some ESG-labelled debt “is very clearly falling into the red bucket”, McNeil said.

This figure rises to almost half of real estate ESG bonds. “About 45 percent of property bonds we rate on impact are falling into the red category. [In real estate], reporting of alignment with standards can often be opaque.”

While the number of low-impact and less sustainable bonds is still significant, McNeil said that “in many cases we’re seeing a part of the market coalescing around best practice”.

He added: “We are starting to have a two-tier market emerging where there’s more competition at the top for high-quality frameworks, detailed reporting, detailed external verification aspects, then at the bottom end the aggregate demand for green instruments in particular still continues to rise and to outstrip supply.

“That residual demand for green instruments is still going to be there regardless of quality in some cases. I think that emphasises the importance of having objective rating frameworks and minimum standards.”

With the demand for sustainable investments within ESG strategies likely to grow in 2023, this will prove to be a major driver of demand for green bonds across the year. Assuming demand continues to outstrip supply of these instruments, McNeil said some investors could feel compelled to purchase irrespective of framework quality.

Missing the boat?

As a fixed-income specialist, Insight has significant experience in carrying out stewardship activities using the asset class, an activity that some have noted remains less well developed compared to equity engagement.

The firm sits on the Bondholder Stewardship Working Group established by climate focused investor group IIGCC and has been a signatory to the UK’s stewardship code since 2021.

However, McNeil raised concerns that fixed-income investors may have missed the boat on engaging with oil and gas companies. “The oil and gas industry has increasingly moved to a range of funding sources for new projects, including self-financing and private markets, so fixed-income investors need to rely on a range of tools to influence ESG performance.

“If the overall exposure of oil and gas companies to public debt markets declines, investors will need to use a wider range of tools (ie beyond divestment alone) to influence climate and ESG outcomes”.