Working around greenwashing risk
Greenwashing risk is an emerging challenge for sustainable finance, and it is felt as acutely by the buy side as any other market segment (see p60). Investors acknowledge concern but insist it cannot be allowed to hinder necessary progress.
VAN KLAVEREN We don't have any green labelled funds but I think greenwashing risk is a concern a lot of firms have – they would prefer to understate and overdeliver rather than run the risk of being proved to not be doing what they said. There are headlines, bad publicity and huge fines.
The other thing is return. Often the end investor will say they want to make the world a better place but they don’t want to give up returns. What they want is to get the same return and also achieve certain outcomes.
Equities are different from debt. Equities have a call option to the upside. In a world where there is a lot of demand for companies that are focused on sustainability and ESG [environmental, social and governance], their equity price can go up.
In our world, our indices are very government-related – corporates are only 7-8 per cent of the composite index.
There is also less upside performance. This shouldn’t stop us investing, because bad ESG companies are more prone to obsolescence and failure, and their spreads or yields can trade at a wider level. But I think it is easier to show a positive link between activity and performance in other asset classes.
“Greenwashing risk is a concern a lot of firms have – they would prefer to understate and overdeliver rather than run the risk of being proved to not be doing what they said. There are headlines, bad publicity and huge fines.”
KELLY Statistics from RIAA [Responsible Investment Association Australasia] on the demand for ethical investment indicate that it is growing.
Greenwashing concerns could erode confidence with investors. If a bond was labelled and it shouldn’t have been, that would be a concern for our investors. However, we do not target labelled issuance specifically and we are very wary of greenwashing.
We welcome the fact that the regulator is cracking down on greenwashing. So long as this kind of activity is taking place, it is going to take capital that should have been allocated to doing good and place it somewhere it shouldn’t be. It is not just misleading: it delays progress toward the transition we desperately need.
GALLAGHER I think it could definitely help the market. Once a company has done part of the work, and if it has the assets, why wouldn’t it? Corporates need to tool up on climate reporting, which will mean they have the systems and processes in place to make issuing a green or sustainable bond easier than it would have been previously.
