In life, talk is cheap, and commitment and results matter. That’s a lesson with relevance in the world of environmental, social, and governance (ESG) investing.
That is to say, it’s easy for companies to use ESG talk to impress investors and regulators, but that doesn’t mean talk is always accompanied by action. As the authors of the paper “Cheap talk in corporate climate commitments: the role of active institutional ownership, signalling, materiality, and sentiment” indicate, there’s plenty of ESG chatter that doesn’t lead to substantive action.
Investors can avoid such situations with the right exchange traded funds, including the Invesco ESG Nasdaq 100 ETF (QQMG). QQMG holds 91 stocks, and while that isn’t the biggest lineup in the world of large-cap ESG ETFs, many of the fund’s member firms have long-standing records of walking the ESG walk — a relevant point for investors looking to avoid greenwashing. Avoidance is key because many companies are simply boasting about ESG, but not necessarily putting words into action.
The paper’s author’s applied deep learning to their research, which “enabled them to extract the amount of cheap talk – defined as the share of precise versus imprecise climate commitments – in each report. Vague, ‘imprecise’ – or outright false – climate claims can be interpreted as ‘greenwashing’,” according to BNP Paribas.
Perhaps not surprisingly, the study indicates that increased level of engagement from institutional investors and nuanced corporate-level ESG strategies are avenues for holding companies to their ESG words.
“They found that active institutional ownership and targeted engagement strategies, as well as climate risk exposed sectors and downside risk-focused disclosures, were associated with less ‘cheap talk’. In contrast, publicly voiced support for the Task Force on Climate-Related Financial Disclosures (TCFD) was associated with more ‘cheap talk,’” added BNP Paribas.
The role of institutional investors in demanding that companies prioritize ESG is relevant in the case of any ESG ETF, but particularly so with QQMG. Many of the Invesco ETF’s major holdings, such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), are widely held by professional investors.
Those companies and other QQMG holdings are already displaying ESG commitments, and with plenty of action at that, but it always helps to have watchdogs to ensure that those commitments are realized. Institutional investors can occupy that role.
“While voluntary commitments are important, we need continuous monitoring and engagement to ensure those commitments are backed by action,” noted Adam Kanzer, head of stewardship, Americas at BNP Paribas.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
