As money has poured into sustainable investing funds, so has “greenwashing,” which in our industry means labeling investments as “sustainable” “ESG” or “green” etc. without a credible underlying process to support that claim. Last week, Bloomberg reported that the Securities & Exchange Commission is considering stringent disclosure requirements for investment funds making ESG claims.
Here at LNWM, we welcome this closer scrutiny because greenwashing in all its forms eats away at the foundations of credible sustainable investing, causing cynicism and apathy. With so many pressing environmental and socioeconomic challenges to be addressed, inaction and denial are the easy way out for investors, fund managers and companies but that’s not going to solve any problems.
There is no question that how capital is allocated greatly impacts the environment and society in the long run. Therefore, investing can do more than build wealth; it can be way to help affect and influence positive change. And that’s why we strive to verify and offer sustainable investing options to clients. (I should note that “sustainable” is the umbrella term we use for ESG, impact, green, socially responsible).
Look Beyond the Label
I suspect that the focus on ESG labels and ratings has allowed greenwashing to thrive. And it can also lead to missed opportunities. We know of asset managers that do not self-label as “ESG” or “sustainable” but whose portfolios rate highly on ESG criteria nonetheless. Just as important, managers who invest in “dirty” industries — utilities, integrated oil and gas, etc. — can be at the forefront of positive change if they are investing in companies actively working to become “cleaner” through new investment and direct action, instead of press announcements about their high ESG ratings.
In our work, we look past ESG labels and ratings to what asset managers are actually doing. That in-depth due diligence is core to our sustainable investing process. In general, we look for three key things that indicate authenticity of purpose and commitment:
- INTENTIONALITY – Does the asset manager have well-defined sustainability goals and a framework for incorporating sustainability factors into their decision-making process? Increasingly in the investment industry, sustainability goals are being aligned with the 17 Sustainable Development Goals put forth by the United Nations in 2015 (UN SDGs) and now widely recognized as guideposts for sustainable investing.
- CONTRIBUTION – Is the asset manager actively working with companies on many levels to promote specific goals? This can include: Using proxy votes to back board members committed to high sustainability standards and shareholder proposals that push the company to do more in terms of the environment; Communicating to management what they need to achieve to qualify as a potential investment; Encouraging companies that do not currently report on ESG metrics to do so while also pushing for improvement in these numbers. We also expect managers to make judgment calls regarding the quality of a company’s ESG practices and to actively promote sustainability practices. We do not believe that an ESG rating service, such as market data leaders MSCI and/or Sustainalytics, is sufficient ESG research. These ratings vary widely and should be considered as inputs but not decision-drivers.
- MEASUREMENT – Is the fund committed to defining, reporting on, and improving impact metrics such as increases in megawatts produced from renewable energy sources, worker pay/promotion, and diversity? Although there is no standard framework for measuring progress toward environmental and social goals, we believe asset managers should be using the best available tools available to provide a general sense for measuring how their portfolio is positioned on stated goals.
Read my colleague Dave Bakers’ post on what we’re doing to strengthen and expand sustainable investing tools and capabilities.