Calls to guard against greenwashing as sustainable investing races ahead

Singapore

WHILE the applause gets louder for the rising interest in sustainable investing - that is, investing according to environmental, social and governance (ESG) principles - calls for safeguards against greenwashing are also growing in volume.

Financial firms are scrambling to harmonise standards and definitions, and to stand by active and transparent disclosures to guard against some companies' practice of making inflated, misleading claims about their ESG credentials.

Figures from French international banking group BNP Paribas show a record US$177 billion having been poured into ESG funds globally last year.

In a recent report laying out trends shaping sustainable finance in 2021, investment bank UBS pointed to a "crescendo of asset owners' voices" calling for companies and investors to provide better sustainability data.

ESG investing in Asia, which has traditionally trailed its Western counterparts, is expected to pick up speed, especially with national commitments toward carbon neutrality.

Within a month of each other late last year, leaders in China, Japan and South Korea each pledged to make their countries carbon-free by mid-century. The UBS report said: "We've seen a distinct shift in conversations, both with Asian asset owners and companies that are interested in the implications of greater disclosures and targets."

But with increased interest also comes increased scrutiny.

Asset management company Schroders' survey of institutional investors last year highlighted greenwashing - due to a lack of clear, agreed definitions on what sustainable investment is - as the biggest challenge to investing sustainably.

The study, which looked at 650 institutional investors around the world, found that half of respondents in Asia had performance concerns related to investing sustainably.

Just over 40 per cent said that a lack of transparency and reported data was restricting their ability to invest sustainably.

About 58 per cent of the Asian investors wanted more data or proof that investing sustainably delivers better returns.

About half (48 per cent) called for greater transparency by companies on both financial and non-financial performance reporting.

Patrice Conxicoeur, HSBC Global Asset Management's head of South-east Asia and chief executive for Singapore noted that corporates, financial institutions and investors must stay vigilant to potential pitfalls from ESG-labelled investments.

"The increasing scrutiny and pressure for transparency from regulators, NGOs (non-government organisations) and investors will enhance protection from greenwashing - sunlight is the best disinfectant."

Still, findings from different providers of ESG data and ratings are difficult to compare. An MIT Sloan School of Management working paper published in 2019 found that in a dataset of five ESG raters, correlations between scores on 823 companies were on average 0.61, or 61 per cent.

UBS' divisional chairman and chair of the Asia-Pacific Sustainable Finance Network Desmond Kuek said banks and investors have an important role to play in promoting common standards.

"The potential for greenwashing should diminish industry-wide, as common reporting standards, definitions and external reviews intensify and gain acceptance ... Crucially, disclosure standards need to be developed further to ensure transparency and justify that a product is deemed or in transition to be sustainable."

But Huang Chaoni, BNP Paribas' head of sustainable capital markets for global markets Asia-Pacific, sees it as unrealistic to achieve full harmonisation across different markets. She pointed to the differences in decarbonisation pathway as an example.

Transparent disclosure is the "best policy" that enables investors to assess specific products against internal investment criteria and expectations, she said.

While most issuers are able to provide relevant information to investors at the point of issuance, also as crucial are their post-issuance disclosure practices. "If issuers cannot deliver regular reporting to investors and key stakeholders, there could be a risk of greenwashing," she said.

Financial institutions are stepping in to fill some gaps. Schroders uses proprietary tools to quantify the positive and negative impact companies have on society and the environment, as well as the impact of rising carbon costs on a company's profitability.

Hannah Simmons, Schroders' global strategic capability manager for ESG, said: "Investors should integrate sustainability analysis with traditional methods of measuring a company's prospects, to help improve their judgment and potentially enhance portfolio performance."

At HSBC Global Asset Management, portfolio management decisions are subject to three separate levels of supervision.

Firstly, the investment guidelines monitoring group uses third-party data sets to verify that the fund's holdings and overall characteristics of the portfolio are consistent with the objectives communicated. Secondly, an investment-oversight capability team confirms that aspects of the investment process are implemented as expected. And thirdly, the internal audit department conducts thematic reviews of all activities, including the preceding levels of supervision.

BNP's Ms Huang noted that greenwashing does not always happen intentionally. "There is a learning process involved: as companies embark on their sustainability journey, their approach can miss critical aspects at first, before getting more sophisticated over time."

READ MORE: ESG magnates pour money into China and its Asian peers