The murky waters of environmental, social and governance (ESG) reporting are coming under the spotlight as many companies are being seen not to be supporting the principles, but are rather seen as simply “greenwashing”.
“The first concern with ESG reporting is that the company’s first priority is profit and the ESG programmes are simply about doing less harm and are not designed to proactively make a positive impact,” says Warren Winchester, Product Manager for Impact Farming at Fedgroup.
“For many companies ESG initiatives and reporting is an ancillary function for the business where it off-sets current harm to mitigate risk as opposed to the business purposefully seeking to make a positive impact across all three of the elements,” he says.
“A company can look to focus its reporting on just one of the three elements, so it could be really good at social initiatives but it’s dumping waste that is damaging the environment,” says Winchester.
According to Winchester there are no specific reporting standards like for IFRS reporting but rather guidelines that allow companies a lot of leeway on what their ESG initiatives are and how they get reported.
“Because there aren’t specific metrics in place, it is almost impossible for investors to compare two companies’ ESG results. There is no clear definition of data metrics, a loophole that leaves investors with insufficient information to make an informed decision as to whether the company or fund is making a true impact,” says Winchester.
Impact investment products are an alternative that investors can consider. “The difference between impact investing and ESG reporting is that an impact investment is designed with the purpose of not doing less harm, but rather actively doing good,” he said.
Impact investment products are built so that they are able to save water, create jobs, use less fossil fuels and a myriad of other benefits that speak to all three elements of ESG. They are also measurable, making it more transparent and easier for investors to understand.
Investors are looking for clarity on the impact that the investment is making.
“Impact investment products are measurable and can be compared like with like to other investments. As an example these products can tell you exactly how much water has been saved, how many jobs have been created and how much renewable energy has been harnessed,” he says. He adds that this will allow investors the opportunity to be able to compare the impact of companies and portfolios across all sectors.
Winchester says that up until now there have been high barriers to entry for impact investment products. “They have been too expensive for the average investor,” says Winchester.
But this is changing. “Investmentportfolios that subscribe to this business philosophy are becoming increasingly aware of how more investors, especially between the ages of 20-40, are actively seeking sound impact investments and this market segment is seeing more opportunities which are now being made available,” he says.
Winchester gives the example of the investment product that he is responsible for, namely Fedgroup Impact Farming, that allows investors to invest in blueberry bushes, moringa trees, macadamia nut trees, solar panels, lettuce stacks and beehives on sustainable farms and earn an income based on the harvest of their chosen asset. “They can dip their toe in the water and start investing for as little as R100 and are able to instantly see what the positive impact is, all via the Fedgroup App,” says Winchester.