How green is your green investment?

  • ESG

The trend of Environmental, Social, and Governance (ESG) investments continue to be an important position in global funds, as we look towards channeling financial resources for a sustainable future. In 2020, global investments in ESG funds topped $35 trillion. Assets tied to these areas are further projected to surge to more than $50 trillion by 2025, or about a third of global assets under management, according to Bloomberg Intelligence.


However, greenwashing probes in recent months such as the DWS Group case have increased scrutiny towards ESG disclosures allegedly being exaggerated or have their real impact questioned.

Tan Bee Lay

Chief Sustainability Officer at SDAX

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Highlights

  • Why greenwashing is happening
  • How do we avoid the bane of greenwashing?
  • The financial green road ahead

Why greenwashing is happening

Greenwashing, a term coined by environmentalist Jay Westfield in 1986, implies any dishonest practices used by businesses to represent themselves as more sustainable either by giving a false impression or providing misleading information as to the sustainability of a product, service or investment.

 

Greenwashing or “green sheen” is a cause for worldwide concern, and in Singapore Deputy Prime Minister Heng recently voiced his concerns over the staggering number of global greenwashing allegations which he fears may not only breed distrust, but ultimately become the bane of financial systems and stability.

 

One of the main reasons why there are allegations of greenwashing is that there are no existing clear rulebooks to abide by and most large corporations are setting their own reporting standards, resulting in an uneven playing field.  As this is an industry that is overloaded with hundreds of different ESG ratings and rankings, there is no common standard nor agreement even among the well-known sustainability rating agencies.  The resulting ESG ratings for the same company can be different depending on the rating agency selected.

 

It may also be the result of fund managers who neglect or do not understand the level of rigor required to prepare and present high quality ESG disclosures.  There are also others who may veil their reports with vague (or false) claims about sustainability efforts to appear that they are engaging in legitimate ESG analysis – these, too, are efforts in greenwashing.

How do we avoid the bane of greenwashing?

Given the ambiguity of ESG as an industry and its measurements, greenwashing is not as easy as it seems to address, but we can take certain steps to mitigate this risk.

 

1. Keep up to date on regulations and standards

Rules covering ESG products are ever-evolving. For example, whilst the Securities and Exchange Commission in the US has defined three types of ESG funds with well-defined parameters – integration, ESG-focused, and impact investing – the 350-odd page document does not elaborate on what constitutes “ESG”.  The European Sustainable Finance Disclosure Regulation (SFDR), on the other hand, provides a clear definition for sustainability investment. With the vast amount of varying information available, it is imperative to keep updated on developments in ESG regulations to manage the governance, risk management and compliance processes.

 

2. Embed best practices

By employing the use of reputable ESG reporting frameworks, the quality of sustainability disclosures are maintained, hence enabling standardized and comparable data. Such examples include: Global Reporting Initiative (GRI), the Principles of Responsible Investment (PRI) or the Sustainability Accounting Standards Board (SASB).

 
3. Provide assurance

Keeping in line with the EU Council and European Parliament’s recent announcement on the rules of the Corporate Sustainability Reporting Directive (CSRD), conducting external assurance of reported sustainability information would demonstrate transparency and reinforce credibility of the company’s ESG status. An example of such standards would include AA1000 Accountability Principles.

 
4. Support trust building

Integrate ESG criteria, based on reputable reporting frameworks, throughout the investment process with due diligence to ensure evidence of robust processes before making claims about how ‘green’ or sustainable the products are.

 
5. Measure what matters

In order to improve the social and environmental impact of the ESG products, it is crucial to adopt robust impact measurement and management (IMM) practices across the investment lifecycle – from strategy to exit, and evaluation. A useful tool to work with would be the 17 UN Sustainable Development Goals (SDG) Impact Assessment Tool as a framework to measure the impact of their investments.

 
6. Employ Data technology

Streamlining data gathering would give rise to clearer, more accessible information which would then be used to quantify the impact of pre-existing ESG portfolios. This can be achieved via technology such as Datalis, which allows for the tracking of ESG company funds and their impact, as well as the constituents of fund managers’ reporting.

The financial green road ahead

We are not nearly at the end of greenwashing practices, but the above suggests key aspects in which we could continue improving to mitigate them.

We have to keep moving forward, as the climate crisis and other social challenges still need to be addressed, and is the reason for the existence of the ESG in the first place. As we look towards tackling the challenges of clean energy, emissions and pollution, while keeping our sights towards an ESG-integrated financial ecosystem, we must keep in mind the environmental adage: “we don’t have plan B because there is no planet B”.

 

Tan Bee Lay is Chief Sustainability Officer at SDAX, and oversees the enactment of SDAX’s ESG Mandate. A certified member of International Society of Sustainability Professionals (ISSP) and Senior Practising Management Consultant (PMC), Bee Lay has more than 20 years of experience as a management consultant, primarily in business and sustainability consulting. She has worked with both public and private sectors on de-carbonization strategies, sustainability policies and processes as well as carbon accounting in value chain management.