The share of sustainable investments has more than tripled since 2018. However, greenwashing allegations may harm growth. The providers of sustainable financial products face numerous challenges.
The sustainable investment industry continues to grow. The share of sustainable investments has more than tripled since 2018. Nevertheless, providers of sustainable financial products face numerous challenges. For example, 90% of those surveyed in a study by the Sustainable Investment Forum (FNG) believe that greenwashing allegations have the potential to harm the growth of sustainable investments. For example, respondents cited the lack of a clear definition of a sustainable investment (82.8%), misleading EU regulation (65.5%), lack of standards (81%) and differences in understanding of sustainability (75.7%) as reasons for the emergence of greenwashing allegations.
Transparency of sustainable investments to be increased
But how can this be counteracted? A large majority of market participants are in favor of further increasing the transparency of sustainable investments to counteract greenwashing. «The challenge will be to maintain the growth trajectory while guaranteeing the quality and credibility of sustainable products», says Bernhard Engl, CEO of the FNG. And he adds, «All possible avenues should be used to advance the socio-ecological transformation. We need transparency, but also diversity in investment strategies. And that includes effective engagement with 'brown companies' that then continue to show up in sustainable or transformation portfolios.»
Prevent greenwashing risks
Greenwashing risks arise, among other things, from the structural problems of regulation, questions about the effectiveness of sustainable finance, and subjective assessments of what sustainable means. According to the FNG, these risks can be prevented through greater transparency on the part of providers and expectation management on the part of customers. This also includes the presentation of opportunities and limitations of the applied sustainability strategies. «Deliberate greenwashing that lacks this necessary basis must not be tolerated», says Engl, and FNG Managing Director Sascha Görlitz adds: «There are different ideas of sustainability and how the necessary transformation can be achieved. Credible action is needed from all market participants.»
A common understanding of greenwashing is needed
To ensure a common understanding of what greenwashing means and to engage in dialogue with other stakeholders, the FNG has developed the following understanding of greenwashing based on the definition of the 'ESMA Securities and Markets Stakeholder Group':
Greenwashing is the practice of misleading financial market actors and investors, particularly (but not exclusively) in connection with gaining an unfair competitive advantage by making an unsubstantiated ESG claim about a financial product or service. A distinction must be made between cases where there is an objective misstatement (greenwashing) and cases where there is a clash of subjective opinions about what is sustainable. The latter can lead to greenwashing allegations.
Sustainability strategies contribute to transformation
As the survey further revealed, the sustainability strategies impact investment, engagement, and voting as part of engagement are the main contributors to transformation. Exclusions, on the other hand, are seen as having rather less potential.
Engagement is considered one of the most promising sustainability strategies. A publicly visible engagement policy that includes details on escalation levels can increase transparency. About half of the financial companies surveyed that have engagement in place say they already have such a policy. The survey also shows that corporate dialogues are predominantly conducted on the topics of climate and biodiversity. Voting rights are predominantly used to improve corporate governance and promote transparency, according to the survey.
The survey also confirmed: The industry is striving for uniform guidelines and standards. In the qualitative responses, respondents would like to see clarifications and harmonization of regulatory requirements. In addition, the establishment of standards and the differentiation between sustainable investments and investments in transformation companies are mentioned.
ESG criteria have a positive impact on the risk-return profile in the long term
In addition, almost all the financial companies surveyed assume that investments according to ESG criteria will have a positive impact on the risk-return profile of their portfolio in the long term. For 82% of the respondents, consideration of ESG factors is a central element of their risk management. Industry experts indicate that compliance with the standards pays off in the long term. To take ESG criteria into account, around 70% are prepared to accept a reduction in returns, even in the short term. «This assessment puts us in a positive frame of mind. There is still a lot of work ahead of us, but the industry knows where the journey must go and what we have to work on in the future to advance the transformation,» concludes FNG board member Engl.
