Sustainable Investing: Hype versus Reality

Interest in sustainable investing has grown around the world in recent years, and investing in 2021 requires looking ahead post-pandemic, where the role of this type of investment could be more significant than ever.

As climate change remains high on the agenda, the green finance movement is booming, and the environment remains a vital consideration this year. The transition to zero emissions has landed, and 2021 marks the first year of a decade that will require significant social and environmental changes if the UN’s 2030 Sustainable Development Goals are to be met.

“Oil majors including Royal Dutch Shell and BP have announced long-term strategies in response to climate change this year.”

ESG (Environmental, Social and Governance), green, ethical or sustainable investing is the process of investing, usually by organisations or high net worth individuals, in environmentally conscious companies or funds, offering hope that big business can step up and confront the climate crisis. Whatever the jargon, are these socially responsible measures changing the investment landscape or are they just paying lip service? While investors are embracing sustainable strategies in record numbers, is there any actual meaningful impact?

Can sustainable investing produce good ROI and simultaneously help address urgent climate concerns? Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, doesn’t think so.  After previously masterminding the introduction of possibly the most ambitious effort to turn Wall Street green, Fancy argues that the financial services industry is tricking investors when it comes to ESG. He not only questioned whether the focus of ESG is valuable but went so far as to label it damaging.

Moreover, Danone, the French dairy consumer group board, has ousted Emmanuel Faber as chief chairman, after activist investors called for changes in leadership amid a slumping stock price and questions over the company’s strategy. Critics said Danone focused too much on its environmental and sustainability efforts at the expense of its financial performance. Despite the challenges amid disparaging public declarations and dismissals, there is reason for optimism.

Across major economies in Europe, cultural shifts and new regulations are shaping the landscape of sustainable investing, and Climate Action 100+ (CA100+), an investor-engagement group representing over $50 trillion in assets, asks companies to set carbon targets, disclose climate risk and improve environmental governance. It seeks to use the powers of investor-led stewardship to transform companies in the direction of decarbonisation and has already reaped rewards with its strategy.

Oil majors including Royal Dutch Shell and BP have announced long-term strategies in response to climate change this year. However, four years into the CA100+ initiative, which began in 2017, has there been adequate impact? Currently results look nominal. Supporters of the initiative say that more time is needed to prove effect and claim its actions have encouraged other companies outside of the scheme to act responsibly. Furthermore, the CA100+ have announced plans to ramp-up engagement with target companies this year, after its progress report indicated that significant gaps remain. Despite years of promises, the world’s largest carbon emitters are failing to take adequate action required to avoid catastrophic climate change.

Most likely, real change needs to be government led. Without strong government action and support to back their demands, CA100+ has a tough job, but with strong policies to incentivise corporates to change their behaviour or an introduction of a carbon tax, CA100+ could legitimately drive its proposal. Investor initiatives such as the CA100+ will have limited success while there remains an economic incentive for companies to operate in ways that contribute to climate change. A strong policy signal, like a meaningful carbon price, would shift corporate and public behaviour by altering the economic nuts and bolts of doing business.

Coming into force over the course of 2021, the EU’s Sustainable Finance Action Plan represents one of the most impactful pieces of regulation to hit the investment management industry since MiFID II challenged reporting and transparency in 2018.  A fundamental principle of the plan is the Sustainable Finance Disclosure Regulation (SFDR), which will classify investment funds in accordance with their sustainability credentials for the first time. This is a step in the right direction.

In the interim, is ESG just for show or a genuine investment philosophy? Sustainable investing is good risk management in uncertain times, and 2020 has been a game changer in this regard. As the COVID-19 pandemic swept across the world, many sustainable investors held their breath, collectively fearful of what it would mean for its remarkable trajectory. But their fears were unfounded – in fact, it turns out that companies that manage sustainable risks well, manage other risks better too.

Claims that ESG is at the heart of every investment process or allegations of greenwashing only serve for investors to be more vigilant in certifying that their funds are as green as they say they are. Typically, businesses main motivation is revenue, not social development. Investors need to be wary of the hype, and when it comes to the environment, hold companies to account.