Pressure grows for tighter scrutiny of funds’ green claims
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Allegations of “greenwashing”, faltering returns, and a political backlash in the US have made it a tricky time for sustainable investing. Now, regulators and investors are focusing on the next steps for what is often referred to as a movement in its infancy. With global fund inflows remaining steady, many say better disclosure, joined-up thinking on regulation, and political action are what is needed for the sector to mature.
Sustainable investing came about because of pressure from pension funds and other investors wanting to channel their money into companies seeking climate solutions — or away from companies making the problem worse.
The fund management industry was happy to oblige, flooding the market with funds labelled “green”, “sustainable” or “ESG” (referring to environmental, social, and governance standards). Sometimes, this was done with little regard to holdings, with managers making only small tweaks to funds before relabelling them.
That prompted accusations of “greenwashing” — overstating sustainability credentials — and led to regulatory action. In the EU, the Sustainable Finance Disclosures Regulation, set out two years ago, requires market participants to justify the sustainability claims of their financial products. In the US, in September, the Securities and Exchange Commission brought in a new rule requiring funds to invest in line with their names. And, earlier this week, the UK’s Financial Conduct Authority confirmed a new regime for the use of the labels “green”, “sustainable” and “ESG”.
This article is part of an FT special report on Managing Climate Change
Among some investors, however, there is a new fastidiousness about pushing for change, driven by an ESG backlash in the US, along with a desire for more political action.
Last December, Vanguard, the world’s second-largest asset manager, pulled out of the Net Zero Asset Managers initiative — a group of investors committed to reducing greenhouse gas emissions. Vanguard said it did not believe it should “dictate company strategy” at the businesses in which it invests.
Meanwhile, in his annual letter to investors this year, Larry Fink, chief executive of BlackRock, the world’s largest asset manager, said it was for governments to play the role of “environmental police”. He later said he had stopped using the term “ESG” as it had been “weaponised” by people at both ends of the political spectrum.
This debate over ESG has reduced inflows into US funds, but there has been no obvious effect more broadly.
Net inflows to conventional and other non-sustainable funds in the first three quarters of this year were negative, according to data from Morningstar. Net inflows to sustainable funds also turned negative in the US in this period, but not in the rest of the world. At the end of October last year, sustainable funds worldwide made up 6.2 per cent of total assets. At the end of October this year, they made up 6.7 per cent.
“You can’t row back the momentum that’s developed over the past 10 years,” says Mark Lewis, head of research for Andurand Capital Management and a member of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, whose final report came out last month. “The investors we have are as interested as ever in sustainability issues.”
One area that has been less contentious is disclosure itself: requiring
companies to reveal their environmental footprint — which can include carbon emissions and biodiversity impact. This can be a tool for investors who want to understand the risks companies are facing, without committing to push the companies to change.
Non-profit CDP (formerly the Carbon Disclosure Project), which runs the global disclosure system for investors and companies on environmental impact, says companies recorded their environmental data in record numbers this year. “I don’t see investors backing away from data,” says Pratima Divgi, head of capital markets at CDP North America.
In contrast to the stance taken by Vanguard, plenty of professional investors view it as their role to encourage companies to set targets for cutting emissions. In the UK, Chris Hohn, a hedge fund manager, launched the Say on Climate campaign, which calls on companies to give shareholders an annual vote on their climate change efforts. Just 0.4 per cent of companies disclosed a credible climate transition plan in sufficient detail in 2022, according to CDP.
Disclosure will be a key goal as sustainable investment moves into its next phase, when investors are likely to be more discerning and wary of greenwashing. However, if companies are to set clear targets to cut emissions, they need governments to clarify their expectations. That will help all investors — regardless of their appetite for engagement — to calculate climate-related risk properly. Ultimately, disclosure is only a means to an end, points out Andurand’s Lewis. “What we really want to see is political action.”
Alice Ross’s book ‘Investing to Save the Planet’ is published by Penguin Business
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