The world is dependent on global finance working towards a fairer financial system for people, the environment and culture with a focus on sustainability, climate change and social justice. This July at The Fintech Times we are putting the spotlight on ethical finance/ethical banking, including environmentally and socially-conscious practices.
The sustainable finance sector has seen global investment in funds with good environmental, social and governance (ESG) soar to more than $35trillion in recent years. But as investment has risen, so have concerns about greenwashing. This is when a company claims to be environmentally conscious, eco-friendly, green or sustainable for marketing and publicity purposes but sometimes isn’t making any sustainability efforts at all.
As demand for sustainability drives the transition to a greener and fairer global economy, what can be done to prevent greenwashing?
Cardo AI
Although the inclusion of environmental, social, and governance factors has evolved into a distinct form of responsible investing, the concept of an ESG-compliant investment isn’t always clear, suggests Altin Kadareja, founder and CEO of Cardo AI, the end-to-end data management, reporting and analytics platform.
He warns that the misrepresentation of ESG progress to portray an organisation as doing more for good causes than in reality, or greenwashing, remains a significant risk for investors.
But says greenwashing – similar to fraud risk – can be mitigated through the right mechanisms.
“Firstly, investors need to increase the reporting and data requirements. The more information you have on a certain ESG compliant investment the easier it is to assess the right level of ESG factor applications, quality and consistency of data reported, and main assumptions used.
“Secondly, investors need to design a framework of positive incentives. No actor in the market wants to play the system if playing right will give him a positive outcome. Investors need to be ready to offer the right proportion of greenium (price premium) for ESG compliant investments in line with their ESG policies and objectives. Therefore, the market needs to have the right monetary incentives to invest time, effort and processes to take the right actions transitioning towards a green economy.
“Thirdly, investors need to equip themselves with the right tools. Questionnaires, in-person meetings, dedicated software and other tools that can be used to find ESG data, identify sustainable assets, continuous monitoring of project’s alignment with the investor’s mandate.
“In conclusion, asset owners should also play a role in this process. As the higher level of the pyramid, asset owners should ‘set the tone’ of main ESG requirements, data needs, reporting frequency, monitoring tools, covenants definitions, and other ESG KPIs.”
PensionBee
As the demand for ethical and green investing has increased, there’s been a surge in the number of ‘green funds’ in the market. Clare Reilly, chief engagement officer at online pension provider PensionBee, says it is essential that savers look under the hood to check what they are actually investing in, as many indexing approaches will still include tobacco and oil companies, for example.
“If savers don’t want to include oil in investments, such as their pension, then they will need to go fossil fuel free, which can mean going down the active management route,” says Reilly. “As these funds tend to use a lot of jargon and confusing ESG ratings, the best way to try and understand if they are genuinely green is to ask the provider about the objective of the fund.”
“When it comes to ‘green’ pensions, the FCA is now looking closely at regulating the sector around climate-related disclosures to avoid ‘greenwashing’, which is misleading savers around the true sustainability of their investments, whilst also making responsible investing products more digestible for a wider group of consumers.”
Impaakt
Bertrand Gacon, CEO and co-founder of Swiss fintech Impaakt, has been at the heart of the discourse surrounding ESG standards for many years; specifically how the financial industry plays a central role in advancing sustainable development goals (SDGs).
He warns that because sustainable and ethical finance are such broad concepts, it makes them highly susceptible to greenwashing.
“The array of terminology and lack of precise definitions is also unhelpful,” he says. “For example, what does it mean if an investment fund has ‘responsible’ in its name? Will it exclude fossil fuel companies, or invest in ‘responsible’ ones? Is it focusing on companies that are responsible towards their shareholders or responsible towards the planet?”
So what can be done?
Gacon suggests that while regulators are attempting to address these difficulties, in the near term, investors should focus on the integrity of the data being utilised.
“ESG asks the wrong questions, it asks what risks the environment, social and governance factors pose to the company. At the core of if, that question needs to be reversed and we need to focus primarily on the net impact of a company on the world.
“Focusing on impact means that promises and practices are cast aside. One method to avoid greenwashing is to run your portfolio through the portfolio diagnostic tool on the Impaakt platform, this will give your portfolio an impact score, one that considers the net impact of the companies in the portfolio.”
Mambu
Mambu is investing in building a global, sustainable and differentiated platform for customers following a record $235million Series E funding round in December last year – the largest private fundraise for a cloud banking platform.
Its recent report, Is the Grass Greener on the Sustainable Side, found that over two thirds (67 per cent) of global consumers think their current bank is guilty of greenwashing – rising to 73 per cent of consumers in EMEA.
Mambu believes better communication is key.
Anna Krotova, director of sustainability at Mambu, says: “Banks are still a long way away from balanced communication about their impacts. It’s very tempting for a bank to present positive stories and emphasise commitments with goals and targets set far out in the future, while ignoring discussions and reflection on hard and contested topics like investments in fossil fuels and other tricky sectors.
“Part of the issue comes down to lack of mandatory standards on reporting which thankfully, is changing now with a wave of regulation on sustainability reporting around the world.
“Ultimately, the only way to avoid greenwashing is to communicate clearly and honestly with customers. Make them aware of your sustainability commitments but be as generous in your discussion around progress and gaps.”
