Avoiding the greenwashers
The sustainable finance sector saw global investment in ESG funds surpass $35tn in 2020. But as investment has risen, so have concerns about greenwashing, where funds’ ESG credentials are exaggerated. In an industry awash with ESG ratings and rankings, the FT’s Charlotte Middlehurst explores how investors can avoid the greenwashers
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In the world of finance investors' growing interest in sustainability has been clear to see. Global investment in sustainable ESG funds topped $35tn in 2020. There's a high demand for sustainable finance and a healthy dose of scepticism too. That's because of concerns about greenwashing, where funds' ESG credentials are exaggerated or their real impact is neither sustainable nor beneficial. Investment specialist Amy Clarke says seeing through greenwashing takes time and effort, especially in passive tracker funds.
It is a problem, no one's denying it's a problem. We've all seen with some of the big index trackers that are either labelled as ESG or they're labelled as sustainable. And you kind of crack open the bonnet, you have a good look inside and you'll see names in there that would raise eyebrows. And you have to ask OK, how has that been able to come into this fund?
A key problem is a lack of common standards in an industry overloaded with literally hundreds of ESG ratings and rankings, many self-reported.
Companies either have their own proprietary frameworks and measurement mechanisms or it will be through extra financial rating agencies of which there are quite a few now. There is often a lack of agreement between the different providers of those ESG scores. ESG scores are a useful starting point but you have to dive into them. You've got to interrogate and understand what they're telling you and what they're not telling you.
Clarke believes that in amidst the confusion one valuable tool for more accurately measuring a fund's ESG impact is the framework provided by the United Nations' Sustainable Development Goals or SDGs.
It's an incredibly powerful tool for an investor because ultimately it's pretty binary, you either invest to deliver the SDGs or you're working against them, which means you're working to further destabilise socially, environmentally, and economically this incredible system that we all live in.
Till now drilling into individual funds to check their credentials has largely been up to investors but financial watchdogs are breaking new ground to combat greenwashing and make sellers responsible for providing the detail on investments pitched as ESGs.
The EU Sustainable Finance Disclosure Regulation means asset managers will have to meet tough standards to market funds as sustainable. The UK regulator wants concise and accessible labelling. Its Swiss counterpart has published guidance on preventing greenwashing, and the International Organisation of Securities Commissions based in Madrid wants members to review their rules and policies.
Specialist lawyer Ian Warner feels regulations are becoming clearer, stricter, and more enforceable. Some of these regulatio,ns do they lack teeth?
Yes, that probably is fair but I think it won't be long before it's a much more rigorous regime.
New technology is being harnessed to track and check the impact of ESG companies and funds.
A couple of years ago we came up with a product that we call Datalis. In particular, we use it in this context to see what fund managers are doing in terms of their reporting and if they are measuring the impact. Investors across the market really are constantly demanding much more in terms of understanding what fund managers are doing with their ESG compliance, their ESG reporting.
Data technology is also making information gathering far easier for businesses like Darshita Gillies' Impact Platform, which also aims to help investors and industry achieve the UN Sustainable Development Goals.
When I see the role of technology it can play a catalytic role in just streamlining the current maze of information that we have.
While clearer, more accessible data can help measure the impact of existing ESG portfolios, Gillies says another important way to enable positive change is by seeking out and investing in harder-to-find targets.
If we take like the aspect of green packaging, there are many innovations or smaller companies that produce renewable packaging for example but they don't have the clients. So investors can actually back some of these companies and give their existing portfolio companies access to solutions.
In the first nine months of 2021 global investors poured $477.4bn into sustainable funds, well above the $366.6bn over the whole of 2020. But is this ongoing investment in ESG really making a difference? CO2 emissions that have more than doubled since 1970 continue to accelerate.
The commitments needed to limit global warming to 1.5 degrees by the end of the century are falling well short. Meanwhile, the output from oil, gas, coal, and other so-called sunset industries is still in high demand and ironically will be needed to produce new green technologies. Gillies believes change will come but we must be patient.
It's a balancing act. We cannot just pull our money out or just close shop because they do support the existing way we live life.
In the meantime, the expertise and information needed to avoid the greenwashes is growing, especially for those investors willing to scratch below the surface.