Investors love ESG. They cannot have enough of it.
At the beginning of 2021, one-third of the global assets under professional management were sustainable. In other words, globally, $1 of every $3 was invested in a green asset (source: Morgan Stanley). As a consequence, sustainable investments climbed ( source: US SIF) 42% in value compared to 2019.
For those who do not know, ESG portfolios comprise funds that invest in companies that believe in sustainability — a commitment to reducing the Environmental, Social, and Governance impact they make. These are companies claiming to go carbon neutral by 2050. Companies that prioritize the welfare of all stakeholders from employees and customers to their suppliers. Companies promising to eradicate inequality and discrimination.
That said, it is quite hard to say whether these companies are sincerely intending to improve sustainability and bring honest change or are they pandering to modern investors. Look at these stats.
A 42% rise propelled sustainability investments to a high of $17 trillion. Merrill Lynch, in fact, estimates that the figure will be greater than $20 trillion in the coming decades. This seems especially convincing when we consider the fact that Biden urged the country’s largest companies to achieve carbon neutrality by 2050. It is estimated that by then more than 60% of the world’s economy would have followed suit.
Returning to 2020, Merrill Lynch, along with Morningstar, has found that ESG indexes are already outperforming their peers, showing signs of immense confidence and growth. Nearly one-fifth of all S&P 500 earnings calls and inquiries cite (source: FactSet) non-financial, ESG data.
Astounding facts and figures like these ring alarm bells. And they should. Do investors find these investments truly meaningful or are they, dazzled by the hype, riding yet another tide? To flip the question, are companies truly making a sustainable change or are they greenwashing?
What is greenwashing?
Greenwashing is the art of making oneself appear more sustainable or green than one really is.
In polite terms, greenwashing represents a cover, an excellent exercise in PR and corporate marketing, pandering to modern investors and customers who increasingly advocate for responsible, sustainable investing.
Bluntly, it is a misleading lie, hypocritical, and fairly unethical.
The unfortunate truth is that quite a sizable share of companies do engage in greenwashing. The Climate Bond Initiative (CBI), a not-for-profit initiative to encourage sustainable and resilient investments, found that out of the $140 billion worth of sustainable debt funds tracked in 2020, only 21% were really, certifiably green. The rest were merely labeled green, having a few shades here and there. They were greenwashed.
Take Tesla, for example, the electric car giant renowned for its sustainability claims. Only two of its three debt offerings were approved as green investments.
There are dozens of examples like Tesla who have exaggerated their ESG impact or outright contradicted it.
Amazon, for example, has been consistently accused of having poor or harsh working conditions. Its workers are unhappy and appallingly micromanaged. Even accusations of union crushing have surfaced! This, despite the fact that its CEO, Jeff Bezos, signed the Statement on the Purpose of a Corporation announced by the Business Roundtable, committing his organization to the welfare of its customers, employees, shareholders, suppliers, communities, and so forth, alike. In fact, a month after Bezos signed the Statement, Amazon terminated the health insurance of more than 1900 part-time Whole Foods associates!
Another CEO that signed the Statement was American Airlines’ William Parker. The airline leviathan, though, has had a nefarious reputation for violating labor laws, being accused by its mechanics of lower pay and harsh working conditions.
The list is quite long.
Wells Fargo, which claims to champion ESG programs, was found to deploy aggressive tactics to cross-sell their products. In an investigation, its employees revealed that the tactics were devised to achieve the ridiculously high targets set by their managers. Many were, in fact, fired because they opened accounts without the knowledge of customers, often forging their signatures. That is anything but good governance.
In 2019, Johnson & Johnson faced a lawsuit that accused the multinational Pharma-giant of downplaying the risks of one of its products. In 2013, the company was fined $2.2 billion for similar charges of improper marketing and not making warnings clear enough.
And then, there is Larry Fink, the chief executive of BlackRock. Fink has been an ardent advocate of sustainable or ESG investing for years. However, it was found that out of the $7.8 trillion worth of funds he managed, nearly $85 billion worth of funds were composed of coal investments. An insignificant amount, but positive nonetheless. Why not go the whole way?
The examples above show the cunning of these companies, and many others, in painting a picture of themselves that is more climate-friendly, equal, inclusive, ethical, trustworthy, responsible, accountable, secure, and all the virtues we associate with sustainability. Even though that might not be the case. The perception, however, works wonders for their stock price.
That is greenwashing 101.
However, before your trust is fully eroded in them, understand that the problem is much murkier than it seems.
How sustainable investments are greenwashed
Unlike BlackRock, there are companies that can go the whole way. There are companies that can properly integrate ESG in their strategy. It’s not that they won’t, it’s that they cannot.
The biggest challenge to materiality assessment in ESG is identifying what constitutes ESG itself.
Yes, that is right. There is no official consensus as to what going the whole way means. There is no agreement as to which factors ought to be identified and analyzed to determine whether a company or organization has properly integrated ESG in its strategy.
At SG Analytics, for example, ESG consulting involves the analysis of hundreds and thousands of different factors across a variety of areas to determine the most favorable sustainability practices.
In fact, all industry leaders identify the most lucrative sustainable investments in this manner. They first identify hundreds of factors that they believe drive sustainability. Then, they thoroughly study companies, collecting data about them in relation to those factors. The data points, which can be in the range of thousands, are used to create a score or scale on which the companies are ranked based on how sustainable they are estimated to be.
However, since there are no official, established guidelines, every ESG consulting firm relies on the quality of its own research. And hence the market is widespread with ESG scores, such that one company may have two different scores, as the scores consider different factors in their assessment.
And hence the market is widespread with greenwashing as well, either because companies make an honest mistake by confusing factors or they intentionally exploit the ambiguity in ESG’s definition. Broadly, greenwashing happens by either —
Excluding or obfuscating information that may negatively affect an ESG score: Recently, Apple decided to ship its iPhones without chargers. As one would expect, critics of Apple exploded. Earlier, when it removed the headphone jack, Apple explained that the jack had to be removed to make the phone thinner. Now, however, when it removed the charger, Apple explained that it did it to reduce e-waste, thereby saving the environment. Which is baffling because Apple then proceeded to sell its next generation of chargers, separately. As The Verge concluded, Apple ditched chargers to save costs, not the planet.
Including extremely few green prospects and yet labeling the entire fund sustainable: Vanguard, the Pennsylvania-based investment advisor managing assets worth $6.2 trillion, released two highly rated ESG funds. However, a report highlighted that nearly thirty stocks were greenwashed. Vanguard dropped the stocks immediately.
(It must be added that, in the second case, a fund manager may include a fund that he or she thinks improves sustainability. However, committees like CBI would disagree, and consider an investment in it greenwashed.)
In this manner, ESG scores are distorted and ESG investors may be misled.
But who is to blame here? The companies that falsely label themselves as green or ESG asset managers who fail to filter out greenwashed sustainable funds?
Well, of course, both.
The problem is clear: a lack of standards. And establishing standards is precisely how greenwashing of sustainable investments can be discouraged.
Here are a few we think might help.
Absolute standards: Just owning under 1% of ESG assets does not make the investment sustainable. ESG investing must be absolute, all or nothing.
Active ownership: ESG investing must not be passive. Instead, investors and, in fact, all stakeholders must take active ownership, regularly voting and engaging in decision-making that distinguishes companies that are making an honest change from companies that are only pretending to do so.
Agreement on factors: Though, active ownership is only possible if the stakeholders agree on which factors constitute true and meaningful ESG data.
Standardized terms: And to understand those factors and their impact on sustainability, stakeholders must understand the terms that define them. Therefore, the terms must be defined with full clarity and transparency, so that nothing is left ambiguous.
Government regulation: Like it or not, regulations could be of immense help. In Europe, the EU is already stepping in to separate the green from the greenwashed.
ESG investing is a great way to promote biodiversity, equality, inclusion, green energy, and all the positive changes that will make the world a better place. But until these changes are made, we will never know which companies truly care and share our vision, and which companies are running a moment marketing campaign.
Until then, ESG investors must be mindful, thorough, and careful in their research. Or, they could get in touch with us, real experts who know what they are doing.
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