Greenwashing and the ESG boom

Over the past few years there has been great enthusiasm behind investing in socially and environmentally friendly companies. Much of this was spurred when the world’s largest asset manager, BlackRock announced a pivotal shift in their investment directive towards responsible investing. When the then manager of nearly $7 trillion (now closer to $10T) of the worlds wealth makes a pivot of this nature, people first take notice, and then they follow.

This has had an incredible impact on the sheer volume of capital being put into these efforts, but whenever there is hype, there are always groups wanting in on the party that don’t know how to act, or that think they can simply wear a costume and still get in. Herein lies the Greenwashing problem. ESG is nothing new, but in all fairness the boom in ESG was rapid, but ESG investing has actually been around since the 1960’s when fund managers would at the direction of their clients, exclude such companies that are involved in “Sin” products such as alcohol and tobacco, or those companies that supported issues such as the Apartheid or Oil and Gas companies that did not meet a client’s “Green” requirements.

So, what can be done? Recently, Europe introduced the Sustainable Finance Disclosure Regulation (SFDR) in 2019, with Level 1 reporting coming into effect this past March 2021 and Level 2 recently coming into effect this January 2022. This forces the industry to standardize disclosure requirements, thus leveling the playing field, and allowing companies to better assert their sustainability claims. In support of greater reporting, BlackRock’s CEO, Larry Fink stated that it was in both the company and the investors best interest to see better and clearer reporting.

This is only the start to enhanced accountability to the industry as a whole. Private companies will always have a murkiness in their reporting, as is justified. However, any professional organization that makes claims to anything, needs to back it up with data in support of such. While US companies are currently under no requirement to comply with the SFDR, unless they interact in any way with European customers, and most do and have chosen to follow SFDR’s in preparation for soon to come domestic regulations with the Securities and Exchange Commission’s (SEC) announcement “to create a system for obtaining environmental, social, and governance disclosures by companies.”

Greenwashing will never completely disappear, but SFDR’s have already helped clean up the industry uncertainty and allow investors to have a clearer picture on a company’s actual commitments to ESG operations.

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References

https://www.bloomberg.com/news/articles/2021-09-01/regulatory-scrutiny-of-esg-greenwashing-is-intensifying

https://www.wsj.com/articles/wall-streets-green-push-exposes-new-conflicts-of-interest-11643452202

https://www.cnbc.com/2021/01/26/blackrock-calls-for-climate-change-disclosure-expects-sustainable-investing-to-continue.html

https://assets.kpmg/content/dam/kpmg/ie/pdf/2021/03/ie-sustainable-finance-disclosure-reg-sfdr.pdf