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