This is Part 2 of our insights on sustainable investing. For Part 1, please check out our article entitled: Sustainable Investing – A Vital Part of our Future
With all these exciting developments in sustainable investing and the increasing number of investors looking to make an impact on the ESG scene, one key issue that cannot be dismissed is that of greenwashing.
Simply put, this is when a company purposefully exaggerates its green credentials in order to “keep up with the times”, thus catching the attention of both investors and the wider public. In terms of business, this can be understood; sustainability has become a big business, but for investors, this trend has made it more difficult to decide whether the information they are being given by potential investees meets their ESG requirements.
Additionally, the recent pandemic has also played a role in bringing to light the benefits of promoting a sustainability strategy for companies: according to JP Morgan, over $500 B was invested in ESG-related funds in 2021, which contributed to a growth of 55% in AUM in ESG-integrated products. This goes to show that investors are clearly seeing the upside to sustainable investing, and are becoming increasingly aware that companies pushing an ambitious sustainability strategy are doing something right. As an example, if a company is reducing carbon emissions, it not only saves the planet, but also acts as a proxy for good management, thus driving up their value-add.
However, even though the premise of sustainable investing looks good on paper, many investors continue to report that they are still unclear about their portfolio’s true level of sustainability. One issue is that when doing their ESG reporting, entities often have to cater to a wide range of stakeholders, from employees to NGOs, to clients and regulators. Because of this, a lot of the information provided holds little relevance to their investors. A related issue is that reporting has evolved bit by bit in this space, meaning that companies can omit reporting on the parts of their business that are not so ESG-friendly, thus leaving their investors even more confused.
Greenwashing can also erode the trust between companies and their target markets. A good portion of regular consumers are unsure about the sustainability strategies of companies, according to a recent study by GlobalData:
Source: FutureCIO
So how can the problem of greenwashing be tackled?
Via a lot of fact-checking and analysis, companies and investors can get a clearer picture of what they are truly doing to push forward the UN SDG goals and their own ESG targets. The key is to ensure that the high-level qualitative views are backed up by quantitative data.
Investors should also look at the actions behind the words for companies: has it established an ESG committee that is creating real sustainability changes within the company’s operations? Has it linked executive salaries to reducing carbon emissions? To gain insights into these questions, investors must not be afraid to take a stand and continuously ask for updates on these and other ESG-related matters. Regular correspondence on whether a company is meeting its ESG goals is also crucial to ensure the investment made is paying off.
Lastly, to have these questions and concerns answered in a timely manner, it is highly recommended that investors make regular visits to the company’s places of business and engage with top management to understand how it is handling its material ESG risks.
Xeraya Capital is part of the Joint Committee on Climate Change, which recently discussed the issue of accelerating the financial sector’s response to climate risk. Have a read of the recent press release here.
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