'Huge disconnect' in ESG product label claims and what they do: Koda Capital

Sustainable investment products often don't do what their names suggest, according to Koda Capital head of responsible and impact investments Kate Turner, who says there is a "huge disconnect" between how funds are labelled, how they actually invest and what ordinary investors can expect.

Earlier this year, Treasury consulted the industry on a sustainable investment product labelling regime, but there is currently no legislation governing how such products are labelled.

Turner told Financial Standard that labelling can give the industry a common language and can help firms like Koda Capital in their process, but it is not a replacement for due diligence.

"Regardless of any legislative regime in the market, I think we would never start and stop with a label," she said.

"How we're thinking about it is how and why a manager looks at ESG. What are the ethical reasons? Are they doing it for risk mitigation? Are they seeking to contribute to positive impact? How does that fit with their investment philosophy and process?

"And then, what's sitting within their portfolio? Are there material ESG risks and opportunities? Are they being appropriately managed? We look at the governance and how it gets implemented in practice. A fund manager can have great policies and programs, but what happens in the day to day? How transparent are they with investors?"

Turner noted there is no dearth in the number of new sustainable products coming into the market.

She said sustainable products are strongest in listed equities and fixed income, with a growing number of high-quality offerings emerging in private debt and alternatives.

"Whether that's private equity or infrastructure, those asset classes really lend themselves to sustainable and impact products, and [there are] some really exciting, great products in that part of the market," she said.

She pointed to the Responsible Investment Association Australasia (RIAA) research on consumer demand for responsible investing, which found that 88% of Australians expect their superannuation to be invested responsibly and ethically.

Yet, the research said 78% of them are concerned about greenwashing and misleading marketing within the financial sector.

"If there's this demand for investment but a lack of confidence, then we need to do something to bridge that gap," she said.

"And I would hope, if and when there is regulation around product labelling, that it really does take that consumer lens on board."