Persistent portfolio greenwashing has alienated many investors and threatened our common desire to invest in a prosperous future, Roman Gaus writes in an essay for finews.first. How do we do better?
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
It has become clear that intentional greenwashing by bad actors and unintentional greenwashing by less competent and less rigid actors may be seriously undermining the entire sustainability sector.
Sustainable investing has never been fully defined. ESG and sustainable investment approaches such as sustainable thematics, low carbon, or impact investing vary significantly in quality and substance, creating the false interpretation that they are equally sustainable. Take climate alignment, for example an EDHEC study revealed that when comparing a fund labeled «green» with a conventional investment fund, stock weights are only 12 percent different, while the remaining 88 percent are the same.
«Overall, we need to be more responsible in the way we use the term sustainable investing»
Banks and asset managers are shamelessly following the sustainability trend and branding their products as ESG, implying that sustainability will be delivered. And it's served them well – the market for ESG and sustainable investing has multiplied over the last decade.
The Swiss Bankers Association agrees: «We need a common understanding about what a sustainable activity is,» they said, in response to Tariq Fancy's attack on greenwashing. «This entails uniform methods of reporting on how companies measure their status quo.» If only that were that easy.
Overall, we need to be more responsible in the way we use the term «sustainable investing». While ESG considers only a narrow shift and remains focused on risks and returns with some mitigation of footprints (negative externalities), sustainable investments should deliver a non-financial outcome, a social or environmental impact. Using the sustainability label should be limited to investments that demonstrate such positive, real-world handprints.
«Even on the rating level, ESG data sends mixed signals»
On a company level, ESG measurements are often nonstandard, incomplete, imprecise, and misleading. Former Timberland COO Kenneth Pucker offers a troubling review Overselling Sustainability Reporting, Harvard Business Review. He shows that inadequate ESG reporting could be more distracting than helpful because investors would realize they've been tricked into believing their investments align with their sustainability agenda.
Even on the rating level, ESG data sends mixed signals. A recent study Aggregate Confusion: The Divergence of ESG ratings, from the MIT Sloan School of Management, shows that if you ask six rating providers about how sustainably a company performs, you'll get six different answers.
«Sustainable investors must have a right to verified non-financial data»
The EU has published a series of new acronyms for sustainable fund classification (SFDR) and reporting standards (CSRD). Regulators in the EU and the US have gone after greenwashing and false marketing claims from banks and asset managers.
Sustainable investors must have a right to verified non-financial data, so they can properly align their sustainability objectives with their portfolios. I agree with many experts that in the future, such disclosures must be verified by independent referees like auditors, financial analysts, or NGOs.
After all, why should investors pay a premium for a sustainable product if the sustainability credentials have not been verified? Asset managers, rating agencies, and particularly green index providers (with billions invested passively) need to step up and subject their offerings to scrutiny by independent experts.
«Already emerging is a new class of activist investors that instills more accountability»
Another observation is that engagement, often touted as an effective toolkit of sustainable investors, is not sufficient for moving the sustainability agenda forward. Already emerging is a new class of activist investors that instills more accountability and demands action, not just talk, by corporate boards. The hedge-fund / ETF hybrid Engine No1 is a great example.
They managed to arrange a vote at ExxonMobile to include two new board members and mandate that the company adopts a high carbon exit plan. Dutch activist group Follow This or U.K.-based think-tank Universal Owner run orchestrated public campaigns that help sustainably-minded investors follow through on their commitments.
«Judgmentally, demand for sustainable capital has already outstripped supply»
The transformation towards a net-zero economy will require a significant investment in energy infrastructure, transportation, and housing. In Germany, annual investments towards climate neutrality in 2050 amounts to 2 percent of GDP annually. Judgmentally, demand for sustainable capital has already outstripped supply.
Persistent portfolio greenwashing has alienated many investors and threatened our common desire to invest in a prosperous future. Only the re-establishment of the credibility of sustainable investing will regain investor trust.
Roman Gaus is an impact entrepreneur, ESG Analyst, and sustainable investor. He is the Co-Founder of Freya Savings, a Swiss fintech company offering sustainable investments for individual retirement accounts (Freya 3a).
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