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Thursday, 11 March 2021

You can’t just say nice green things and call yourself an ESG investor

New European Union (EU) rules to regulate ESG investment products and prevent greenwashing went into effect yesterday. The EU’s new rules are part of a wider series of green finance regulations that will see investment products categorised as sustainable or non-sustainable, reports The Financial Times. In the first stage, products will be designated as dark green, light green and non-sustainable depending on their climate and social impact. Any asset manager who wants to market their fund as a sustainable product will be subject to tough disclosure requirements.

New reporting criteria: The second stage, which comes into effect in 2022, will require funds to report on issues including carbon footprint, investments in companies active in fossil fuel sectors and exposure to controversial weapons such as cluster bombs.

But deforestation and other indicators were taken out of the equation, after heavy lobbying last month, the EUR 17 tn asset management industry swayed Brussels to remove a number of indicators asset managers have to report on, reports the FT.

You can find the EU’s directives on the new non-financial reporting legislation here (pdf).

So, what’s greenwashing? The term refers to companies that promote misleading claims about ESG credentials in a bid to attract investors, as environmental, social and governance issues have become a central part of the investment mainstream, experts tell the WSJ.

Case in point: While BlackRock and Vanguard signed a commitment entitled the Principles for Responsible Investment meant to integrate ESG information into their decisionmaking, the companies were all present on a list of “dirty thirty” funds that tracks asset managers with investments in coal. Vanguard topped that list, while BlackRock came in second. The icing on the cake: Vanguard last year threatened to vote against company directors who do not align with global efforts to reach net-zero greenhouse gas emissions by 2050. You can read all about this naughty list in a story we published last week.

As greenwashing ramps up, regulators have turned their attention to how investors can decipher sustainable investment products. The new regulation is “groundbreaking” and “allows investors to compare between different products and how sustainable they are and see what asset managers are doing to integrate sustainability,” Maria van der Heide, the head of EU policy at responsible investment activist ShareAction, told the FT. Meanwhile, University of Roehampton Professor Molly Scott Cato says the “overdue” regulation will allow investors to have a “better understanding of the impact of their investments on people and the planet.”

Could the US follow suit? The Trump administration pushed back on ESG and even introduced rules to make it harder for some pension funds to incorporate ESG principles into their portfolios, but things could change under the Biden White House. The Democratic Party has already unveiled a series of measures on climate change, including rejoining the Paris Climate Agreement.

The potential for more global regulatory scrutiny has triggered a chain reaction of companies scrambling to get green. Chevron CEO Mike Wirth laid out a “pathway” toward net zero emissions in the coming decades following years of the US oil giant shying away from such a move over concerns on eroding returns by pivoting aggressively to new, unfamiliar business lines, reports Bloomberg. This comes a week after Exxon Mobil said it sees “money-making” potential in carbon offsets and partnerships with venture funds to finance carbon capture.

The messaging shift has also been picked up by several pension funds and asset managers: The Institutional Investors Group on Climate Change launched a “net-zero investment framework” this week to provide practical guidance on how to both decarbonise investment portfolios and increase investments in climate solutions, according to a statement. Currently 33 asset managers and owners, managing USD 9.8 tn in assets, are putting the framework to practical use. What’s more, Wells Fargo, Goldman Sachs, and Citigroup are among the firms that have committed to achieving carbon neutrality, without going into details about the practicality or implementation, writes Bloomberg.

ESG boomed in 2020, fueled by the pandemic and rising concern over climate change, with the total assets in specialist sustainable investing mutual funds hitting a record of almost USD 1.7 tn during the year, up 50% from 2019. A majority of sustainable funds have outperformed their equivalent conventional funds over one, three, five and 10 years, according to a study by data provider Morningstar. Over 90% of leading sustainable indices beat their parent benchmarks in the 1Q2020 and continued to show resilience throughout the year’s volatility, according to research by BlackRock.

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