Speaker 1: So you're an environmentally minded investor, where should you park
Speaker 1: your money? An EESG fund could be a good option,
Speaker 1: but what even is ESG? Today? On Parts per Billion,
Speaker 1: we talk about what those three letters mean and why
Speaker 1: they may not mean as much as a lot of
Speaker 1: people think they do. Hello, and welcome back once again
Speaker 1: to Parts per Billion, the Environmental podcast from Bloomberg Law.
Speaker 1: I'm your host, David Schultz. For some time now, there's
Speaker 1: been a movement among certain investors who are concerned not
Speaker 1: just with getting a return on their investments, but also
Speaker 1: on the behavior and societal impact of the companies they
Speaker 1: invest in. The name for these investors is EG, and
Speaker 1: that stands for Environmental, Social and Corporate governance. I guess
Speaker 1: the C and corporate is silent. To cater to the
Speaker 1: growing number of ESG investors. There are now a lot
Speaker 1: of companies not to mention musual funds and ETFs that
Speaker 1: market themselves as good ESG investment. What does that actually mean?
Speaker 1: What does the company have to do to be able
Speaker 1: to don the ESG halo? According to reason reporting from
Speaker 1: Bloomberg Laws, Andrew ramonas not nearly as much as you
Speaker 1: might think. Andrew's been covering the evolution of ESG investing
Speaker 1: for quite some time, and he says there are now
Speaker 1: efforts from both the public and private sectors to more
Speaker 1: tightly regulate what is and isn't an EESG investment. And
Speaker 1: we'll get to that in a second, but first I
Speaker 1: wanted to revisit a podcast I did with Andrew way
Speaker 1: back in February, just a few weeks after the inauguration.
Speaker 1: Back then, he said the new Biden SEC might move
Speaker 1: at lightning speed to require more corporate environmental disclosures. I
Speaker 1: started by asking him, well, did it. No, they haven't yet,
Speaker 1: but they are working towards that. They released an agenda
Speaker 1: recently that puts ESG disclosure proposals out in this fall,
Speaker 1: so hopefully by October or November, folks might start seeing
Speaker 1: what the SEC is actually thinking about as far as
Speaker 1: ESG disclosures go. Well, that's important because you know, a
Speaker 1: lot of people are talking about and thinking about ESG investing,
Speaker 1: and I think a lot of more people are talking
Speaker 1: about how the rules for what is an EESG investment
Speaker 1: and who can call themselves an ESG investment are are
Speaker 1: surprisingly lacks. So you're you're doing some reporting now about
Speaker 1: some new measures that are going to be taken. What's
Speaker 1: the latest that's going on right now? The SEC and
Speaker 1: a group called the CFA Institute, which is an ethics
Speaker 1: organization for the finance industry. And that's uh see it.
Speaker 1: Let me see if I can get the CFA Certified
Speaker 1: financial a what's the A Chartered financial analyst? Actually, you're close?
Speaker 1: Was I close? I don't think I was that close? Sorry,
Speaker 1: go ahead, Chartered Financial Analyst analysts. Yes, they're coming out
Speaker 1: with some requirements, at least on the the CFA Institute side.
Speaker 1: These would be voluntary guidelines, if you will, and the
Speaker 1: secs would be actual mandates. Right, And let's take a
Speaker 1: step back and remind listeners why this is important because
Speaker 1: ESG investing is no longer sort of a niche part
Speaker 1: of the market, Like this is a big deal. Can
Speaker 1: we quantify, like how you know big a part of
Speaker 1: the investing market? This is trillions of dollars. There is
Speaker 1: a lot of money in this, and a lot of
Speaker 1: money hinges on how ESG is defined, and right now
Speaker 1: it's sort of ambiguous term. At least in the United States.
Speaker 1: There are no ESG disclosure mandates. There's no ESG definition.
Speaker 1: You know, it's sort of whatever you want to say
Speaker 1: it is it is at this point, but the SEC
Speaker 1: is really looking trying to, you know, put some more
Speaker 1: clarity around that. So, I mean, this is kind of
Speaker 1: a silly hypothetical here, but like, could I just start
Speaker 1: like the Schultz Fund, the Schultz SG fund, where I'm
Speaker 1: just saying, like, yeah, I'm going to invest in all
Speaker 1: these like environmentally friendly companies. I'm not going to tell
Speaker 1: you what they are or how I decide what that is,
Speaker 1: but they're going to be ESG funds and all you
Speaker 1: environmentally conscious investors just give me all your money and
Speaker 1: I'll invest them. But I could do whatever I want
Speaker 1: with that, Like, is that is it as loose as that? No,
Speaker 1: you know, to some extent, you can't under SEC rules,
Speaker 1: you can't lie about your investments. You can't give misleading
Speaker 1: or false statements. You have to make some disclosures. And
Speaker 1: the SEC already because of their interest in how firms
Speaker 1: are handling ESG, they've been looking to see if, okay,
Speaker 1: if your firm puts out a poll saying, you know,
Speaker 1: we're investing in ESG this way, and these are our funds,
Speaker 1: and this is how they invest in ESG and then
Speaker 1: the SEC and you don't actually do what you're saying
Speaker 1: that that's a problem even under current rules. But what
Speaker 1: gets a little bit more hazy is you know, when
Speaker 1: you say something is green, but what really is green
Speaker 1: or what's really socially responsible? There's not a definition of that. Yeah,
Speaker 1: and that leads into the concept of greenwashing, which is
Speaker 1: something that you have written about and are writing about.
Speaker 1: Can you talk a little bit about that. How the
Speaker 1: SEC is sort of worried about this, that greenwashing of
Speaker 1: ESG funds is becoming a problem. Yeah. Gary Gensler, the
Speaker 1: new Democratic chairman of the SEC, has spoken about this
Speaker 1: as well as other Democrats on the Commission. They fear
Speaker 1: that asset managers could be misleading UH investors about what
Speaker 1: actually is in these you know, ESG funds and products
Speaker 1: that they're that they're marketing, and you know, Gainstler has
Speaker 1: said that he wants UH investors to add the ability
Speaker 1: to sort of look under the hood of these these
Speaker 1: funds and understand a bit more about you know, what
Speaker 1: exactly is these ESG you know, things that are are
Speaker 1: are in there. But let's get back to the CFA
Speaker 1: Institute you know, you mentioned that they're putting forward their
Speaker 1: own standards for what any SG funds should be. Those
Speaker 1: would be voluntary. The SEC's actions, meanwhile, would not be voluntary.
Speaker 1: Why are there these two parallel processes going on, Like,
Speaker 1: why is the CFA Institute doing this if the SEC
Speaker 1: is just going to come up with its own set
Speaker 1: of rules that are mandatory. Well, groups like the Investment
Speaker 1: Company Institute and the and SIFMA, these are trade groups
Speaker 1: that represent asset managers. They they don't think CFA Institutes
Speaker 1: their work is really necessary at this time. They think
Speaker 1: they should, you know, wait until the SEC's done and
Speaker 1: then maybe do something after that. They think there's just
Speaker 1: too many, too many cooks in the kitchen, so to speak,
Speaker 1: right now. But CFA Institute is really, you know, it
Speaker 1: believes that it doesn't really have time to wait. They're
Speaker 1: already are you know, funds are already being marketed as
Speaker 1: ESG and right now it's sort of a wild West
Speaker 1: in the US of you know what, what is an
Speaker 1: ESG fund? You can kind of say whatever you want.
Speaker 1: And the CFA Institute is trying to bring some clarity
Speaker 1: to what it says, is trying to bring some clarity
Speaker 1: to investors that it says they want, and some higher,
Speaker 1: higher quality disclosures which they say they're not always getting.
Speaker 1: That's interesting. So so the CFA Institute is not saying,
Speaker 1: you know, we don't like what the SEC is doing,
Speaker 1: We're doing our own thing. They're more saying like, we
Speaker 1: just need we need these rules now. We can't wait
Speaker 1: for you know, the government, which is famously very slow
Speaker 1: moving to move very slow. We need something now because
Speaker 1: this is such an unregulated area, right, that's correct, and
Speaker 1: they're trying to they're trying to get ahead of the
Speaker 1: game and trying to give these firms they don't want to,
Speaker 1: you know, they would like to have something. There's at
Speaker 1: least some firms that want guidelines, something that they can
Speaker 1: point to and tell their customers, Hey, you know, we're
Speaker 1: following this. We're we're in good shape, and you should
Speaker 1: be confident the investments that you're making at these RSG. Yeah,
Speaker 1: this really seems like one of those areas where a
Speaker 1: lack of regulation actually hurts like everyone in this market
Speaker 1: because there's you know, if there are firms that actually
Speaker 1: are you know, creating funds that only invest in environmentally
Speaker 1: friendly companies or you know, and spend a lot of
Speaker 1: time picking and choosing those those investments. You know, they're
Speaker 1: they're competing against people who don't do that, who aren't
Speaker 1: really spending a lot of time making decisions about what
Speaker 1: companies to invest in. And so that's that's a competitive
Speaker 1: disadvantage for them. Yeah, but you know, some of these
Speaker 1: financial industry trade groups that what they're concerned about is Okay,
Speaker 1: CFA Institute releases its disclosure standards. You know, some firms
Speaker 1: start complying with it and try to match what the
Speaker 1: CFA Institute wants and then come, you know, a few months,
Speaker 1: maybe a year or so down the line, there's a
Speaker 1: disclosure framework that the SEC puts out that maybe it's
Speaker 1: the same, but maybe it's a little different, and then
Speaker 1: you have to change everything again, and that could be
Speaker 1: that could be challenging for a firm to do. All right, Finally,
Speaker 1: let's take a step back here and think about the future.
Speaker 1: You know, ESG investing is relatively new. Uh, it's obviously
Speaker 1: in a state of transition. What's it going to look
Speaker 1: like in let's say five years. Are we going to
Speaker 1: see the term ESG become so heavily regulated that It's
Speaker 1: almost like the term organic, where like USDA, you know,
Speaker 1: has a very specific set of conditions about which farmers
Speaker 1: can be labeled organic and which products can be labeled organic.
Speaker 1: Is that where we're heading with with ESG. That's a possibility,
Speaker 1: you know, the SEC which would take the lead at
Speaker 1: least in the US on trying to you know, make
Speaker 1: some sense of ESG. They could very well have definitions
Speaker 1: about what each part of ESG from the environmental, the social,
Speaker 1: and the governance means and it could become very you
Speaker 1: know regular. It's just will kind of wait to see
Speaker 1: what happens. You know, there's always there's different approaches where
Speaker 1: you could have you know, where you where there might
Speaker 1: not be you know, specific definitions. It might be sort
Speaker 1: of a Okay, you have what you have in your
Speaker 1: mind as ESG, Well you got to explain it better
Speaker 1: to your customers. And if you don't explain it then
Speaker 1: you're in trouble. Yeah, I mean, is that even something
Speaker 1: that people in Wall Street want? Like, do they want
Speaker 1: ESG to be very the term the brand ESG to
Speaker 1: be very strictly regulated or are they like no, let's
Speaker 1: just sort of let the market decide. Yes, I think
Speaker 1: I think Wall Street. A lot of Wall Street kind
Speaker 1: of likes the flexibility where they can they can define
Speaker 1: it as how they want. But on the other side,
Speaker 1: there are investors who are calling for more specific and
Speaker 1: definitions of what it all means. So there's kind of
Speaker 1: the you know, the the perennial conflict between investors and
Speaker 1: you know Wall Street over what, you know, what should happen. Well,
Speaker 1: that will provide a lot of grist for Andrew Monus's mill. Andrew,
Speaker 1: thank you so much for joining us on Parts per billion.
Speaker 1: We'll have you back on again to talk about it great.
Speaker 1: Thanks for having me. That's it for today's episode of
Speaker 1: Parts per Billion. If you want more environmental news, check
Speaker 1: us out on Twitter. We have to handle at environment.
Speaker 1: I myself am at David B. Schultz. That's B as
Speaker 1: in buy shares of the Schultz Fund today and today's
Speaker 1: episode of Parts Pervilion was produced by myself, David Schultz.
Speaker 1: Partsber billion was created by Jessica Coombs and Rachel Dagle.
Speaker 1: Our executive producer is Josh Block. Thank you everyone so
Speaker 1: much for listening. I am going to be off for
Speaker 1: a few weeks, but I will see you when I
Speaker 1: return from my vacation until then, Sign arm for our
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