Greenwashing threat grows with rise of sustainable investing

Building Sustainable Cities

The growing threat of greenwashing in sustainable investing could result in resources and attention being diverted away from the world’s pressing sustainability needs.

If you are among the growing number of investors leaning towards reaping the rewards from positive change, how can you be sure you’re putting your money where the truth is?

The question follows rising concerns over greenwashing and scepticism over the real impact from sustainable investments, which focus on environmental, social and governance (ESG) goals in addition to financial returns.

To guard against greenwashing — the act of marketing investment products as “sustainable” without the substance to back it up — regulatory and industry bodies are stepping up to help investors better understand the performance of ESG investments.

The problem with greenwashing

Recent evidence of greenwashing was surfaced in August by Britain-based think tank InfluenceMap, whose study of 593 ESG equity funds found that 71 per cent had portfolios misaligned with the Paris Agreement’s global climate targets.

As ESG-stamped products tend to attract more money from asset owners wishing to make an impact, greenwashing could result in resources and attention being allocated away from the world’s pressing sustainability needs.

Mr Tariq Fancy, the former chief investment officer of sustainable investing at asset manager BlackRock, recently decried the ESG label as a “marketing gimmick”; it has become a “deadly distraction” from systemic action on the part of governments.

The mismatch between public signalling could hit investors’ financial returns too.

Research from the Singapore Management University found that hedge funds that publicly endorsed the United Nations’ (UN) Principles for Responsible Investment but held inadequate ESG exposure in their portfolios subsequently underperformed higher-ESG peers in financial gains.

By the numbers

  • Over a third

…of the US$140.5 trillion (S$189 trillion) in projected total assets under management by 2025 could be ESG-linked, says Bloomberg Intelligence, the research arm of Bloomberg

  • US$53 trillion

Expected value of ESG investments worldwide by 2025, according to estimates by Bloomberg Intelligence

  • More than half

…of climate-themed investment vehicles analysed by think tank InfluenceMap do not align with the Paris Agreement’s global climate targets

Tackling the lack of disclosure

Regulators globally have been responding to this problem.

Since March, the European Union’s Sustainable Finance Disclosure Regulation has required fund managers to adhere to uniform standards when disclosing the impact of ESG-labelled portfolios, tightening the parameters around what can be called a “sustainable investment”.

The US Securities and Exchange Commission has also assembled an enforcement task force to root out ESG-related misconduct such as embellishment or misstatements in disclosure of climate risks.

In Singapore, the Monetary Authority of Singapore (MAS) will also announce new disclosure standards for Singapore retail ESG funds by early next year.

“We need to make sure that, as green investments become more mainstream, there are strong disclosure requirements in place,” said MAS’ managing director Ravi Menon last month.

The goal is to enable investors to better understand how an ESG fund selects its investments. They will be able to get information within a single document on the fund’s investment process and ESG risks, and will also receive periodic updates on whether the ESG fund’s investment objective has been met.

Other challenges investors face in evaluating ESG investments include gaps in coverage, in terms of timeliness and regional coverage.

“Markets move quickly, and updated information needs to be factored into valuations and research,” says Mr Thio Boon Kiat, group chief executive officer of UOB Asset Management (UOBAM).

In Asia, the gap in data coverage for emerging and frontier markets is especially significant.

When companies lack resources to provide adequate data to third-party rating providers and the rating agencies lack incentive to provide extensive coverage, developing markets end up being penalised, he observes.

As a result, many companies in Asia are lagging behind global peers in ESG ratings.

The role of investment managers

“Despite this, we have seen rising consumer demand and a push from the governments to focus on sustainability issues,” Mr Thio says.

As governments put climate change on their national agenda, companies in the region are firming up commitments to slash carbon emissions and set net-zero targets too.

Against this backdrop, the help of professional investment managers can be invaluable to individuals looking for sustainable investment solutions that meet their financial and sustainability goals.

UOBAM, for instance, has developed proprietary ratings and assessments that tap on artificial intelligence and machine learning models to process ESG data. It complements this with a system that tracks in real-time controversial news that might negatively impact companies in its portfolios.

More investment managers are now also tapping on stewardship, or active ownership, to effect change and boost ESG performance.

At UOBAM, the active ownership process of direct dialogue with investee companies, wielding influence via proxy voting and other escalation strategies, is key to its own responsible investment approach. It is part of its fiduciary duty as an investment manager to act in the best long-term interest of investors too, Mr Thio adds.

“Active ownership translates into action that can positively influence the companies we invest in to engage in sustainable business practices. Through active ownership, we can also create long-term value for these companies and in turn help make a positive social and environmental impact,” he says.

Challenges in understanding ESG ratings

The popularity of sustainable investments has led to a proliferation of ESG ratings produced by third-party agencies, which are meant to help an investor gauge how well a company or fund performs in those areas.

UOBAM’s Mr Thio, notes, however, that “navigating ESG ratings can be a challenge, especially for individuals investing on their own”.

First, understanding ESG scores is not just a matter of comparing assigned grades. A rating is not just a metric for sustainability; it also reflects the resilience and preparedness of a company to deal with ESG issues, Mr Thio says.

Navigating ESG ratings can be a challenge, especially for individuals investing on their own. MR THIO BOON KIAT, group chief executive officer, UOB Asset Management

The sheer multitude of ESG rating providers and their contradictory ratings adds to the challenge.

“Rating providers’ inconsistencies and the inability to compare their findings often confuse investors,” independent economic think-tank Milken Institute said in a 2020 report.

Its analysis of 948 firms and their 2018 ESG scores from three major rating agencies — RobecoSAM, Sustainalytics, and Thomson Reuters — found significant discrepancies in ratings, even when scorers used similar definitions.

To improve ESG ratings, rating providers must go beyond definitions, says the Milken Institute. Its recommendations to rating providers include “standardising the data, achieving greater clarity in labelling ratings, and making their objectives more transparent”.

Concerns over the transparency of ESG ratings were also raised by the International Organisation of Securities Commissions, a global regulatory committee.

Its July 2021 report noted potential conflicts of interest over fee structures and insufficient separation of business lines within firms providing ESG advisory services to issuers and producing ESG ratings.

Building Sustainable Cities is a series sharing insights on how individuals and businesses can take action to forge a cleaner, greener tomorrow.

This is the 12th of a 15-part series in collaboration with

Building Sustainable Cities

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