How Asking the Right Questions Can Protect You from Greenwashing
Produced by Bloomberg Media Studios in partnership with Standard Chartered.
As sustainable finance becomes more mainstream, greenwashing concerns are making well-intentioned investors increasingly wary about how and where they can make a positive impact with their money.
Record-breaking fund inflows continue to push ESG-themed assets to new heights amid growing concerns about climate change and other societal issues. Assets linked to economic, social and governance metrics surpassed $35 trillion in 2020 and now comprise one-third of total global assets under management. At the going rate, ESG assets could exceed $41 trillion this year and $50 trillion by 2025. [¹]
While enthusiasm to invest into the ESG theme continues to grow, marrying purpose and profit isn’t easy. The lack of standards is one of the main concerns among investors and regulators. Opaque ESG-labeled products and strategies make it easy for money managers to exaggerate just how sustainable an investment is. Take for instance environmental funds holding coal companies that do not have a clear transition plan, or where the fund manager does not have an engagement strategy or when the integration of ESG factors is optional.
“The industry needs consistent standards,” says Eugenia Koh, Global Head, Sustainable Finance, Consumer, Private and Business Banking, Standard Chartered. “We need clear taxonomies and public-private partnerships for better data disclosures so that investors can understand and compare their options. While that will take time, investors can start to protect themselves from greenwashing by learning to ask the right questions.”
Asking the Right Questions
Broadly, there are four approaches to sustainable investing: exclusions, ESG integration, thematic investing and impact investing. Understanding each empowers investors to ask important questions that will help them determine whether an investment aligns with their personal goals.
Exclusions prohibit a company’s securities from being included in a portfolio due to business activities that are deemed unethical. Common examples include companies that make weapons, violate human rights, produce vice goods such as tobacco or harm the environment.
“The average investor would expect that an exclusionary instrument doesn’t have any investments in controversial industries,” Koh says. “But most of the funds out there use a threshold approach. A fund that excludes tobacco and alcohol, for instance, might set a revenue contribution threshold of 5-10%. This would prohibit tobacco makers but allow supermarkets that sell tobacco as long as tobacco doesn’t comprise more than 5-10% of their revenue. Investors must determine whether thresholds align with their needs.”
ESG Integration incorporates ESG data into investment decisions and analysis with the aim of enhancing risk-adjusted returns.
“Not all ESG data is created equal,” Koh says. “If you’re looking at banks compared to mining companies, the types of ESG risks would be quite different. For banks, material ESG risks might deal with anti-money laundering and data privacy. For mining companies, the risks may lie with safety and carbon emissions. So, investors must question whether ESG integration looks at the right data and if it’s embedded across the entire investment process.
“If you’re thinking about ESG integration, and if the claim is that opportunities which embed ESG considerations will eventually perform better in the mid- to long-term, then you want to ensure that these funds are walking the talk.”
Thematic Investing focuses on long-term trends rather than specific companies or sectors. The adoption of electric vehicles and the circular economy are examples of themes and structural shifts that people can invest in.
“In thematic investing, one concept to think about is purity,” Koh says. “If you invest in an environmental fund or a fund that focuses on the circular economy, you need to look at what kind of companies it includes. How pure are those companies in contributing towards the overall theme? And if it takes a revenue contribution approach, what are the thresholds? Understanding how a thematic investment is constructed will help investors determine whether they’re doing what they claim. Some investors might be comfortable with a mix of companies including those which are not ‘pure plays,’ while other investors prefer a fund which has a greater proportion of ‘pure play’ names.”
Impact Investing entails making investments with the intention of generating positive, measurable social and environmental outcomes along with a financial return.
“The concept of impact investing is that it needs to deliver additionality,” Koh says.
“There needs to be an intentional impact element to it. If something’s claiming to be an impact investment, make sure that you know the reporting around it and that the impact is really embedded.”
Discovering Opportunities
Given that sustainable investing is in nascent stages in most parts of the world, and asset managers have different approaches in developing ESG products, Standard Chartered established its in-house criteria, the ESG Select framework, for the selection of its high-conviction suite of sustainable funds to better curate the solutions. This complements its broader sustainable investments universe, where it leverages data from 3rd party data providers to define.
“As part of our ESG Select process, we put a lot of emphasis on understanding the strategy of a fund and the breadth and depth of ESG integration,” Koh says.
“We also probe on engagement type questions. When an asset manager tells you that an investment is driving progress, it’s important to know what that means. How are they actively engaging? Do they hold the companies to targets? How are they progressing towards their net zero pathways? This isn’t always easy for the end investor.
“We feel that it’s important to continue challenging the asset managers that we partner with, so that we can raise some of these kinds of standards to what we would define as a high conviction, sustainable investment on our end.”
While the bank has stringent standards on what fits the ESG Select framework, growing emphasis on mitigating greenwashing from both investors and regulators will eventually make such standards commonplace. Yet, Standard Chartered’s ESG efforts stand apart due to their focus on emerging markets, which account for 80% of the bank’s footprint.
“Given that a lot of the sustainability issues that we’re trying to solve for are in the emerging markets, we in a privileged position to have a nuanced view and understanding of what it means and how we can facilitate topics like transition,” Koh adds. “When it comes to big themes like net zero, we understand the challenges and opportunities in these markets. And we bring that intelligence into our ESG curation.”