Rapid expansion is being seen in the ESG (environment, social, and governance) investment sector. It has been estimated that ESG funds oversee over $330 billion, and this number is expected to rise in the near future. Despite its good effects, the rapid expansion of ESG has raised questions about greenwashing, in which businesses exaggerate or invent their commitment to sustainability. Funds want to protect their relationships with their investors from this, but how?
The term “greenwashing” has gained widespread recognition. There is still a lot of ambiguity surrounding both definitions and procedures. We examine this trend and inquire into its implications for financiers.
To elaborate, greenwashing occurs when a corporation makes false claims about its environmental practices. Unfortunately, it’s a widespread phenomenon in many modern businesses. Companies are under increasing pressure to disclose their environmental track record to an increasingly knowledgeable consumer base as sustainability has become a big business.
Investors concerned with environmental, social, and governance (ESG) issues may find it difficult to tell where specific pieces of company information about sustainability lie.
An estimated 90% of corporations in the Fortune 500 Index conduct sustainability reporting, as reported by the Governance and Accountability Institute. In Europe, it’s essentially the same story.
Hans Hoogervorst, head of the International Accounting Standards Board, disagreed in 2019 and claimed that more disclosure will not always motivate businesses to improve their environmental performance. We shouldn’t put too much faith in sustainability reporting to get businesses to put the environment before profits, he warned.
Few investors would have paid much attention to sustainability reporting even a decade ago. Environmental, social, and governance (ESG) investing, on the other hand, has become increasingly mainstream in recent years.
Shareholders stand to gain significantly if a company can cut its energy use without sacrificing or even slowing production. Reducing carbon emissions is not only to help the environment. Instead, it stands for competent leadership in many contexts. In turn, this can provide valuable, true information about investment quality.
Despite the proliferation of sustainability reports, many shareholders still lack clarity on an organization’s actual commitment to environmental and social responsibility. Having to account for numerous interested parties is a source of stress for businesses. Employees, NGOs, clients, and authorities all fall within this category. The end result is a plethora of data, much of which has no bearing on ESG-focused investors.
Institutions have begun requiring sustainable portfolio construction and business practices from asset managers as a condition of investing as climate change concerns have gained traction. The good news is that asset allocators are increasingly supporting ESG initiatives. However, there is currently no agreement on ESG standards on a worldwide scale, allowing for a variety of methods by corporations and, in some cases, charges of greenwashing.
Given the relative subjectivity of ESG, there is room for debate and nuance over what constitutes a “good bet” in terms of financial capital. It’s possible, for instance, for a fund manager to defend an oil major investment on ESG grounds, provided they show they’ve been actively engaged with the firm in question, which has as its stated objective the transition to net zero, even though this isn’t yet the case.
Some managers may claim to be ESG-compliant, but they invest in “brown” firms that have made only empty promises of making adjustments to become more ESG-compliant. Fund managers’ credibility as ESG experts may take a hit if investors lose faith in the possibility of such corporate misbehavior being unchecked.
Investors are increasingly taking a stand against “greenwashing.” Investors are beginning to pull their money from managers with shaky ESG credentials, while others are choosing not to issue mandates in jurisdictions where they believe greenwashing is taking place. Authorities all around the world are working to resolve the crises that have plagued the ESG funds industry.
The US Securities and Exchange Commission (SEC) is taking a hard stance against flagrant ESG mislabelling by proposing a new “Fund Names” requirement that would forbid managers from using ESG labels (e.g. calling themselves a Green Fund) if they are not investing in ESG assets. Consequences for disregarding environmental, social, and governance standards have already been implemented.
BNY Mellon’s investment arm was fined for making misleading claims about the ESG quality reviews of certain of its mutual funds. Meanwhile, it has been reported that a few Goldman Sachs mutual funds are under SEC review due to concerns that their ESG indicators are at odds with their promotional materials.
Asset managers, at the most fundamental level, need to demonstrate how they incorporate environmental, social, and governance (ESG) considerations into their investment operations. Businesses may easily submit their ESG KPIs to customers and, if necessary, regulators, with the help of an Enterprise data management system.
As we begin to see some consistency in the way ESG data is reported at every level, investment firms that meticulously record their ESG procedures and apply a disciplined approach to data management will be in the greatest position going ahead.
A robust recordkeeping system and openness on this subject will be crucial for fund managers to earn mandates and avoid criticism from investors and regulators alike since it is obvious that institutions and regulators are taking an increasingly harsh position on ESG.
An efficient, real-time data management platform provides the manager with an all-encompassing perspective of the firm’s investment strategies, enabling them to better match the needs of their clients with those of genuine ESG funds and facilitating ongoing monitoring of funds as part of comprehensive profiling. After some time, ESG will be used as a metric by investors.
Now more than ever, corporations and managers must demonstrate that they are making decisions based on high quality, real-time data rather than speculative shifts in policy. When a company implements a real-time enterprise data management system, it has access to information that is actionable, understandable, current and trustworthy, which improves its ability to interact with investors.
The degree to which a corporation has institutionalized sustainability is also crucial to consider. Does it, for instance, create environmentally responsible board oversight? Does it tie compensation for top executives to cutting emissions?
When it comes to questioning those who engage in anti-greenwashing practices, what happens? Here, continuing to have a financial stake in the company and the confidence to challenge management based on hard facts and real-time data is crucial for getting to the bottom of the numbers. One distinction is between consistently successful businesses and those that are barely missing their sustainability targets. In contrast to the latter, the former may be setting easy targets.
In simple terms, bad data or a lack of data facilitates greenwashing whereas a robust ESG strategy backed by good, real-time data and the associated assurances it provides, is the best way to spot and tackle greenwashing. = or avoid it in the first place.