As long as ESG keeps having an effect on investment opportunities, “greenwashing” is going to become a worldwide problem.
When ESG was first presented nearly two decades ago, its purpose was simple. It involves giving environmental, social, and governance criteria priority while making investments.
The environmental criteria refer to environmentally friendly corporate practices and efforts, while the social criteria refer to how the corporation appreciates its employees, and the governance criteria refer to the level of transparency in the company’s management.
Sustainable Carbon Management
Today, ESG is widely adopted and implemented by organizations worldwide.
In fact, studies show that ESG integration, in which ESG issues are taken into account when making investment decisions, will be the most common way for corporations around the world to invest in a way that is good for society in 2021.
For example, if a business invests today, ESG factors will be part of the decision-making process.
If an investment opportunity makes money but isn’t good for the environment, it’s not likely to get a lot of money.
According to the Harvard Law School Forum on Corporate Governance’s ESG Global Study 2022, Europe continues to lead the ESG push.
31% of European investors cite ESG as key to their investing strategy, compared to 18% in North America and 22% in the Asia-Pacific region.
Influence On Public Policies
Greenhouse gas emissions are one of the most important and relatively basic sustainability measures.
The efforts of scientific and research bodies and alliances such as the GHG Protocol, CDP, IPCC, PACTA, and PCAF4 have led to more precise guidelines for calculating GHG emissions in a fund. Respected sustainability experts and rating agencies then apply these standards.
While progress is being made on the accurate measurement of GHG emissions, a standard assessment of a company’s overall sustainability performance remains elusive.
It is still hard to find a meaningful way to measure the total environmental, social, and governance performance that works for all business sectors, company sizes, countries, and regions.
Some have questioned, on a deeper level, the efficacy of voluntary sustainability investment programs as a response to the problem of climate change, regardless of whether the quality or ranks can be enhanced.
In a startling piece published in August 2021, Tariq Fancy, former Chief Investment Officer for Sustainable Investing at BlackRock, said that ESG funds can be a “deadly distraction” from a true focus on government systemic action.
His condemnation may, however, be an exaggeration of the situation.
True, industry-led ESG and climate investments can only be supported by government-led legislative measures and multilateral efforts to address environmental and social issues.
Nonetheless, green investment can not only demonstrate what is effective, profitable, and measurable, but it also has the potential to influence government policies in a favorable way.
Complexity Cannot Be Replaced By Simplicity
In addition to the debate over the integrity of the investments contained inside ESG funds, questions have been raised regarding the accuracy of ESG rankings; services that assess individual companies and assign numerical scores for sustainability performance.
In July 2021, the International Organization of Securities Commissions (IOSCO) determined that the grading methodology for ESG funds lacked clarity, coordination, and transparency.
IOSCO also identified potential conflicts of interest in situations when consulting firms supplied ESG services to companies while also producing ratings or data packages containing the same companies.
Sustainability analysis is at least as tricky as financial analysis, given that it must take into consideration interdependent social, political, regulatory, and scientific aspects.
Clearly, there is a need for improvement in terms of definitions and criteria, but it is a common misconception among raters and some fund managers that a uniform and decision-ready assessment of sustainability fitness exists.
Furthermore, regardless of how strong the measures are, there will always be worse products on the market. This affords investment managers the option to select a dubious green fund and sell their clients on its questionable environmental credentials.
False Claims Are Being Stopped By The SEC
ESG relies on third-party rating agencies to evaluate the legitimacy of businesses; however, there is no common standard or process underlying ESG evaluations.
Inconsistencies have made it hard to define what it means to follow ESG standards, so some investors aren’t sure if they’re investing in an ethical and sustainable company or not. This may soon change.
Recently, the Securities and Exchange Commission (SEC) ended the comment period on two proposed rules that would particularly address this concern. The ideas would establish uniform criteria, such as greater shareholder disclosures.
The SEC has also set up an ESG enforcement task force to find issues with ESG funds’ disclosure and compliance.
Critics assert that the proposed SEC restrictions do not go nearly far enough, while climate activists view them as a move in the right direction.
Is This a Case of Greenwashing?
ESG investing is a way for people to put their money into companies whose social, governance and environmental standards get high marks in independent reviews.
It is a popular method for investment portfolios that span generations. In a 2021 study, it was found that Gen Xers, millennials, and baby boomers all like to hold sustainable investments for the same reasons.
Since 2016, there has been a 300 percent increase in the number of investment managers who say they have at least one ESG fund in their portfolios.
Increased interest in ESG investing has drawn less ethical actors seeking to benefit from the fad, as well as dilution of the measures and principles that help maintain the underlying investments aligned with sustainability aims.
Greenwashing has become a significant issue for ESG. Studies indicate that an increasing number of ESG funds invest in companies that hardly exemplify social and environmental responsibility.
The Economist analyzed the world’s 20 largest ESG funds in 2021 and discovered that each of them owned assets in fossil-fuel companies, as well as oil producers, coal-mining, gambling, alcohol, and cigarettes.
Overall, ESG investing is on the rise, and this surge in interest has led some companies to make false claims about their sustainable policies in order to attract investors.
The SEC is proposing two regulations to curb this technique, known as “greenwashing,” and investors should take this as an opportunity to assess their own ESG funds.