﻿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
crack open the bonnet and 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 is 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’s 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 regulations, 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 in terms of understanding what fund
managers are doing with their ESG investments, 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
into 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 greenwashers is growing,
especially for those investors willing to scratch below the surface.