- The fast-growing sustainable investment sector is coming under scrutiny.
- Many investors are concerned by the possibility of greenwashing.
- Stronger definition of ESG products is needed, while investors must hold organizations to account.
In a stark message in the wake of COP26, more than half of consumers across 17 markets believe investors and financial services companies have an obligation to help the environment and should be doing more. Enter sustainable investing! Sustainability-aligned investing has been growing fast: Bloomberg estimates that by 2025, more than $53 trillion could be invested globally in sustainability funds and portfolios.
Sustainable investing (or, as some call it, responsible investing) isn’t anything new, but it has undergone some evolution. What started a few decades ago as a somewhat basic ethical assessment of business activity has matured into a more thorough integration of environmental, social and governance (or, ESG) factors via quantitative and qualitative assessments.
This development aims to more precisely measure 21st century business risks that may have adverse societal or environmental consequences or affect financial performance – and identify corresponding opportunities. This has also birthed many new financial products, such as ESG-specialized exchange traded funds (ETFs) and green bonds.
However, there has recently been a healthy dose of scepticism raised regarding sustainable investing. Regulators (such as the US Securities Exchange Commission, the UK’s Financial Conduct Authority and the European Commission) are paying close attention to green claims and the construction of sustainable financial products. There are also other critics claiming sustainable investing might be doing more harm than good. So where does this pushback leave the industry?
Legitimate ESG concerns
There has been much discussion of the calculus of sustainable investing: What is the trade-off between ESG considerations and financial returns? How aligned is environmental due diligence with the fiduciary duty of an investor (i.e. their obligation to work in the best financial interest of their clients)? There is a growing consensus that incorporating ESG factors into the investment decision-making process is of critical importance for exercising fiduciary duty – but the debate is ongoing.
Meanwhile, as sustainability has risen to the top of corporate agendas, so too has the risk of greenwashing. In fact, it is a top concern of global institutional investors, cited by six in 10 respondents as an issue when selecting sustainable investments, according to a Schroders Institutional Investor study. It’s also been known to be a problem for retail investors, who especially struggle to decipher complex ESG investments.
The burgeoning ESG market measured in trillions of $ of assets under management