Time to talk about greenwash
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At no point in history has it been so easy to trade in financial products that claim to be ethical, sustainable or responsible in some way. According to the Global Sustainable Investment Alliance a record $31 trillion of assets are now managed in a sustainable way.
But in such a large market, with such a wide variety of active and passive products many investors lack the necessary information to understand whether these financial products are genuine about their positive impacts on society and the environment. The lack of universal standards and structure means that there is no gatekeeper to protect against “greenwashing”.
Last November a research paper by wealth managers SCM Direct found widespread mislabelling of ethical products. The paper cited a Fidelity fund marked as ‘socially responsible’ that in fact held 6.2% in tobacco companies at the time. This led to an urgent industry review by regulators into the misclassification of green or ethical funds.
The debate heated up further last month when Larry Fink, CEO of the world’s largest investor BlackRock, pledged to move to a more sustainable business model, prompting climate activists to storm BlackRock’s Paris offices accusing it of greenwash. At the same time it is very positive that BlackRock and other large investors have joined the movement. It is important to encourage broader industry momentum towards responsible investment and keep the tent open and as more and more investors commit to responsible practices gradually increase the standards. For example, the Principles for Responsible Investment, that was set up to raise the bar on responsible investment back in 2006 in its early days started by welcoming almost everyone to join the initiative irrespective of the stage they are in and is now gradually looking to tighten the standards and requirements. Back in 2018 the UN-supported Principles for Responsible Investment (PRI) said over 10% of the more than 2,000 asset owners and managers who promised to be responsible investors were not living up to PRI minimum standards. Since then a number of signatories likely to be delisted has fallen to around 50 institutions with $1tn in assets according to the PRI. So while some might argue that this is the proof that greenwashing exists others will argue that the system is working and the standards are getting tougher. So how can asset allocators avoid greenwash and what does Kempen do about it?
To be sustainable, we must define sustainable
The breeding ground for increasing greenwash is the underlying confusion when it comes to what exactly can be counted as green or sustainable investing. There is no clear definition, even among the various sustainable finance labels that exist across Europe, about what actually counts as “ethical”, “green”, “sustainable” or “impact investing”.
As discussed in our last newsletter this is hopefully changing - in Europe at least- with the introduction of the EU’s sustainable finance taxonomy, ecolabels and climate benchmarks. By actively taking part in industry wide consultations Kempen has supported the formation of these new regulatory standards, which will help clarify which investments can correctly be described as green or sustainable, and whether funds can be described as low-carbon and ‘Paris aligned’.
This month, on 09th March, the Technical Expert Group (TEG) on Sustainable Finance, the group of experts advising the European Commission on its proposed taxonomy published its long-awaited final 600 page final report (with a 67-page accompanying summary)
At Kempen we want to stay ahead of this regulatory curve. At the end of last year we introduced our own ‘Sustainability Spectrum’, a major piece of work which specifies clear sustainability thresholds in order to classify all products and services, across all parts of the Van Lanschot Kempen Group.
The Sustainability Spectrum - known as the ‘five flavours’ - is explained in detail in our upcoming Stewardship and Responsible Investment Report next month. At its heart however, is an attempt to distinguish between those financial products which aim to ‘do no harm’ (i.e. they take ESG factors into consideration but don’t use them as a primary driver of decision-making), and those that actively seek to ‘do better’ or ‘do good’ and therefore apply a ‘best in class’ approach or seek to invest in solutions that drive positive real world outcomes.
“Investors can cut through the greenwash by doing their homework on the funds they invest in. Do you know if the fund excludes, integrates, engages or does all three? Is there clear reporting against the set sustainability objectives?”Narina Mnatsakanian, Director Responsible Investment
Cutting through the greenwash
As a first step, asset owners should understand what the asset managers’ overall organisation’s commitment is to responsible investment. Is this something that they do across all of their assets? Is their entire board fully aligned and committed or is this something that they do for a few funds only while the rest of the organisation is doing business as usual? What is the overall responsible investment policy? Once that is clear it is necessary to look at the specific fund’s approach to responsible investment. For example, what is the exact policy of the fund? Does it exclude, integrate or engage - or all three? They should then check the evidence of implementation and reporting against the claims. One idea would be to include the responsible investment approach and/or goals in the prospectus of the fund and then report regularly on the progress in a timely manner
At Kempen when selecting external managers for our fiduciary clients we score them on their ESG capabilities on six core criteria. This includes assessing their commitment to RI, levels of ESG integration, active ownership, transparency, implementation of exclusion requirements and positive impact. For more information on external manager scoring reading our upcoming report.
When it comes to our own funds we also aim to implement best practices. For example, Kempen aims to provide transparency on our website about the fund’s sustainable investment approach and how ESG issues are integrated. It also gives specifics, such as the ESG scores of underlying holdings or details and, where relevant, of companies excluded or engagements that have taken place.
To help sort the wheat from the chaff, there are also an increasing number of benchmarks and initiatives analysing asset manager performance on responsible investment. These include the Morningstar Sustainability globes and this report from non-profit Share Action on 75 of the world’s largest asset managers.
Engagement with purpose
As a long-term steward, we also believe that when investors engage with companies to do better they must do it with both clear objectives and the rigour required to change corporate behaviour. Our robust methodology on active ownership, including our policies and approach to milestones, as well as our measuring impact is available in our annual reporting.
Investors must also be willing to act if engagements don’t work. Last year, for example Kempen engaged with German health and agribusiness giant Bayer over its acquisition of Monsanto and their significant controversies in the field of GMO. We had several discussions with Bayer but did not experience enough progress. In June 2019 therefore, the ESG Council of Kempen decided to put Bayer on our list of companies to avoid whenever practically possible.
If a fund is advertising active ownership as its platform for sustainability then investors should ask for examples of engagement cases and the outcomes achieved. Engagement is a multi year process and achieving results may take time. When a fund has many investments there will certainly be some examples to mention over time.
Sustainable investing is at a crossroads – fuelled by interest from millennials to mainstream finance, its prospects for further growth are highly encouraging. It is good that the movement is getting momentum and more are joining and starting to act. But, as Kermit the frog once said, ‘it’s not easy being green’, and the industry and its regulators need to ensure that investors are not misled when it comes to allocating capital to truly sustainable funds. Fortunately, Kermit also said: “Changes happen as time passes by”, so while there is still some way to go on the journey to truly sustainable investment, the direction of travel is clearly the right one. Sustainable investment is going mainstream.