Learnings from the fight against greenwashing: when words and actions align!
The last decade has seen an increased focus on environmental, social, and governance (ESG) policymaking and implementation, and a rise in new investment funds to match. The past few years, however, have also exposed ESG fractures in the industry. One of the areas of growing concern is greenwashing and how investors can weed out funds that have been overstating their sustainability credentials. While not an exclusive solution to the problem of greenwashing, impact investing can help solve for some of these concerns.
Addressing the Problem of Greenwashing
One of the primary negatives that has sparked debate and controversy in the area of responsible investing is greenwashing— the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical. It is clear there have been corporations and asset managers that have failed to apply proper controls in their processes related to ESG investing. Some financial providers have spuriously labelled their products as ESG, green or sustainable without these measuring up to their sustainability credentials.
But let’s not lose sight of the objectives that underpin clear and material ESG policymaking. Understanding ESG factors within a portfolio is an extension of good research. It broadens risk management to include very real ESG risks that could influence financial returns in the future. This represents progress. In many ways, integrating ESG risks into decision-making is a formalisation of the reality that corporate governance and business risk management have always mattered to financial returns.
However, as ESG labels have been broadly applied in an era of mass adoption, concerns about greenwashing have arisen. In response, regulation is being tightened globally: the clarification of standards and evidence of their application will be a considerable influence on ESG processes, as well as product labelling going forward. We expect disclosure standards are likely to deepen, and regulatory frameworks will continue to evolve.
Impact Investing—Measurement and Accountability
When considering the role of impact investing as a tool to address these tensions, it is important to distinguish between ESG integration and impact investing. At T. Rowe Price, ESG integration involves the incorporation of ESG factors into consideration as part of our wider investment analysis in identifying investment opportunities and managing investment risk*. It is not exclusionary, but inclusionary, and, in order to execute successfully, requires qualitative and quantitative insights.
Similarly, our definition of impact investing is explicit. Impact investing is the intention to generate positive environmental or social impact, alongside a financial return. It is focused on finding companies that we believe can compound both positive impact and financial returns in the future. It excludes companies that do harm, as well as those that have no material positive impact on the environment or society. Importantly, by nature, impact investing applies a high bar of qualification and disclosure with respect to impact inclusion and therefore reduces the risk of greenwashing in our view. Impact investing also offers a direct way to influence and address the challenges of measurement as impact investors typically go even deeper by adding measurability and engagement.
*For certain types of investments, including, but not limited to, cash, currency positions, and particular types of derivatives, an ESG analysis may not be relevant or possible due to a lack of data. Where ESG considerations are integrated into the investment research process, we may conclude that other attributes of an investment outweigh ESG considerations when making investment decisions.
Impact Investing and ESG Fractures
Impact investors measure outcomes and progress through impact‑oriented key performance indicators, alongside financial targets. These are recorded, documented, and measured for progress over time, providing a clear impact and financial return thesis that aims to improve the clarity and reporting of the investment case within the dual mandate. That contrasts with ESG integration, which is part of the security analysis process, helping evaluate the E, S, and G risks of a company’s operations. Put simply, impact investing focuses on the external effects of one company’s business activities on societal and environmental issues. ESG integration focuses predominantly on the company’s internal operations.
As investors assess their ESG policymaking and implementation in light of the frictions within the sector, we believe impact investing will play a material role in furthering analytical and reporting standards within the industry and, ultimately, helping to improve investor confidence that their capital is invested as intended.
From a financial return perspective, we also have conviction in the business models and compound growth prospects of the stocks we own. Given the importance of evidencing impact processes, there are times when questions may arise about whether impact investing involves a sacrifice of potential returns. In direct response, we target companies that we believe are growing and compounding financial returns alongside and, often, because of the impact case and associated demand for the respective products and services provided. Sustainability and growth of financial returns, quality businesses, and industry growth are all strong foundations from which to facilitate impact as a style of investing in aiming to deliver competitive returns.
RIAA Certification
With significant focus on greenwashing and misinformation, this is where RIAA’s Responsible Investment Certification Program comes in. RIAA Certification differentiates quality, true to label responsible investment products which meet the Responsible Investment Standard. RIAA rigorously checks that claims a product provider is making are what they say they are, and champions transparency. Through our partnership with RIAA, we really learned a lot in terms of disclosures required for the intended audience, what was required on an ongoing basis and how to communicate on our activities. We believe clients value this independent assessment.
At the recent RIAA Conference Australia in May, Joe Longo, Chair of Australian Securities & Investments Commission provided a keynote address on the regulator’s view on greenwashing. Following this keynote, I joined Joe Longo alongside a panel of industry experts to discuss our learnings from the fight against greenwashing to date. If you attended the conference, please check your emails for a link to view this session recording.
Caroline Ramscar, ESG Investment Specialist & Vice President of T. Rowe Price.
Caroline Ramscar is an investment specialist focused on environmental, social, and governance capabilities for the APAC region. With over 20 years of experience in financial markets, Caroline plays a key role in representing T. Rowe Price’s Responsible Investment and Corporate Governance teams with clients, prospects, and consultants. Based in Sydney, Caroline engages with clients on ESG considerations across asset classes and work in partnership with clients as they adopt more responsible investing strategies. She also supports the firm’s Impact suite of products, which includes investment strategies across equities and fixed income that seek to deliver positive societal and environmental impact alongside financial returns. Before joining T. Rowe Price, Caroline spent 10 years at Legal & General Investment Management in London, including 5 years as Head of Sustainability Solutions. In that role, she was responsible for engaging with clients on sustainability considerations and also sat on several internal and external ESG committees and industry working groups. Prior to that, she had worked at several global financial firms during her long tenure in the industry. Caroline earned a B.Sc. in International Management and French from the University of Bath.
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Disclaimer: The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA). This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions.