When investors and their advisers gather there is a single recurring theme that arises again and again: environmental, social and governance (ESG) investing.

So it was in Paris this week as the great and the good of European fund management and asset owners gathered for the Global Invest Forum, the industry’s annual get together to share and debate the biggest issues affecting what they do with billions in savers’ hard-earned money.

On day one ESG investing, along with its closely related cousin impact investing, emerged repeatedly—even in sessions designed to tackle other issues.

With pressure from politicians, regulators and law makers on companies to help drastically cut carbon emissions, investment has become an important channel through which to influence the main producers of greenhouse gases.

But the topics under discussion offered a direct clue to the direction in which companies will find themselves shepherded over the coming years if the Paris Agreement—restricting global warming to 1.5 degrees, certainly no more than two degrees, above pre-industrial levels—is to be met. Those topics: data, standards and greenwashing.

Data for ESG investing

The difficulties involved in integrating ESG into investment decisions emerged as immense. This was illustrated by one chief investment officer who said that of the €16bn under management, 5% was in green investment, a further 2% had just been disinvested from fossil fuel. That left 93% “we have to shift”. Another pension fund officer, when asked if his fund had any assets in nuclear energy, confessed he did not know. A lot of work still to do there then.

What most asset managers and owners asked for is more data. As one investor said: “We need more data to find out where we have to shift.”

Companies might believe they are already producing more data than any busy fund manager could possibly need but there are clearly discrepancies. This were illustrated by Huub van Der Riet, portfolio manager, impact investing with NN Investment Partners in the Netherlands. “Companies that are big in scale have big departments that have the ability to deliver the analysis,” he said. “Smaller companies don’t have the ability to do that kind of reporting.”

This is important because regulators increasingly seek ways of pushing companies to be more transparent about their activities.

The EU has been pushing this strategy for some time now with non-financial reporting. That said, there is now a parallel push to aid investors. This has merged through the European Commission’s Technical Expert Group (TEG) which is producing advice on sustainable finance. The main work of the TEG has been the production of a taxonomy—a classification system, or screening criteria—that enables investors to identify “sustainable activities”.

The taxonomy elicits a mixed reaction. Will Martindale, director of policy and research at campaign group Principles for Responsible Investment, believes it is a welcome addition to the investment landscape even though it is “complex, but designed to deal with complexity”.

Others worry that the taxonomy could be too “strict” and therefore inhibit green investment.

Anxieties elsewhere focus on the proliferation of standards in the area of sustainable finance, including the EU’s green bonds, a standard intended for use in judging the sustainability qualities of a bond issue. Florence Saliba, vice-president of financing and treasury at Danone, the French food giant, said in a plea for consolidation: “Too many standards can lead to a lack of clarity.”

Diverging attitudes

Investors clearly worry about definitions of sustainability. This was brought home by pointing out the diverging attitudes towards nuclear power, even among neighbouring countries: France views it as sustainable; Germany, famously, does not.

There are also more complex tensions to work out. Another investor pointed to BAT, the cigarette maker. The company might score well on an ESG index because of its sustainability policies, but do poorly when viewed in the light of impact investing criteria because “cigarettes are bad for you”.  That may seem like stating the obvious, but sometimes the obvious can prove slippery to address in policy.

The difference here is brought home by a stark difference in emphasis: ESG measures tend to focus on “inputs”; impact investing has an eye on the “outputs”, or outcomes.

There was also much talk of “greenwashing”—claiming sustainability credentials that are not borne out in practice—whether it be companies or in investment products.

There was some scepticism that the situation is as bad as media reports might suggest, but Will Martindale offered a sobering thought on the investment industry.

“What we are seeing now is that investors are calling themselves ESG and selling products with that label. Regulators are not well set up to oversee that,” he said.

ESG engagement

Though rule makers clearly want investors to place pressure on companies, it may not always be that effective. Emmanuel Parmentier of INDEFI, a consultant to investment firms, revealed research that investors were fifth in the line of biggest influences on boards behind clients, first, then NGOs, employees and regulators.

Investors’ top engagement concern is also governance, with ESG and climate a close-run second. There are big variations across Europe in the use of engagement as a tool for ESG integration. INDEFI research reveals it at 100% of those surveyed in the Netherlands, while in the UK the figure is 71% and in Germany just 33%.

In an interview with Board Agenda before the conference, Will Martindale warned that despite the Paris target of 1.5 degrees, capital markets are currently funding 3.5, sometimes four, degrees of warming. “We haven’t yet seen the transition necessary,” he said.

However, the Global Invest Forum at least revealed asset owners and managers grappling with the issue, wrestling with the definitions and many leading the way on integrating sustainability policies. They may not be the biggest influence on boards: clients take that honour. Nevertheless, there is much more investor activity on ESG to come. Corporate boards should take note.