The motto of sustainable investing is that you can do well while doing good. The well-done part has been shown to be questionable, as sustainable investing does not generate superior returns. The question remains: is sustainable investing really good?
Unfortunately, confusion over what defines sustainable investing makes it difficult to measure whether an investment actually has a lasting impact. This prompts retail and institutional investors to engage in their own research to try to determine how sustainable their investments really are.
Sustainable investing continues to attract large amounts of capital, as investors want to contribute to positive change, such as reversing climate change, promoting social justice and advocating for better governance. According to Bloomberg, assets under management (AUM) that are invested globally in sustainability funds and portfolios could reach $ 53 trillion by 2025, representing more than a third of the total expected AUM of 140.5 trillion dollars.
Currently, Europe represents around half of the world’s sustainable assets. European demand for sustainable investing has prompted 253 European funds to change their investment strategy or portfolio in 2020. In addition, Europe has seen 505 new sustainable funds launched in 2020 alone.
Increased growth is expected in Asia, particularly Japan, where McKinsey has linked sustainability to a 400-year-old cultural ethic of shuchu kiyaku, to think about societal benefits, not just profits.
As noted in my previous article, the United States is also seeing strong growth in sustainable investing, which accounted for over 25% of all money invested in U.S. equity and bond mutual funds in 2020. .
The greenwashing effect
Given the strong investor demand for sustainable investing around the world, the stakes are high to counter current concerns about greenwashing, in which companies overestimate and exaggerate their positive impact on sustainability. It is more than a problem of perception. A group of researchers define greenwashing “as a combination of misconduct and deceptive communication”, including the intentional fabrication of false information.
It has become increasingly difficult for investors to see through greenwashing when companies present themselves as more sustainable or environmentally friendly than they actually are. In a recent survey by Quilter Investors, greenwashing was at the top of the list of concerns among 44% of investors surveyed. In another survey, six in ten investors see greenwashing as a challenge for sustainable investing, especially as sustainable investing is becoming more and more common for investors and fund managers.
European sustainable investment standards
Europe is well ahead of the United States in setting sustainable investment standards with the initial implementation of their Public Financial Disclosure Regulation (SFDR). The SFDR entered into force in March 2021 and sets the rules for sustainability-related information that the financial sector in the EU must disclose.
The aim is to prevent investment firms from greening sustainability claims to make their investment funds more attractive. There are two aspects of sustainable investing, called dual materiality, that the SFDR tries to measure consistently. The first question is whether a business or an investment really has a lasting impact on the environment or on society. The second is whether the lasting impact of a company materially influences its investment performance? Also as part of the SFDR, investment managers will need to start providing details on how they consider environment, social and governance (ESG) factors and other factors as part of their process. selection of individual investments in their portfolios. As a result, it is hoped that investors will gain clarity.
The SFDR has received some criticism for potentially adding to the confusion over how funds are classified; however, the promoters hailed it as providing much needed transparency. In a recent the Wall Street newspaper In this article, Wolfgang Kuhn, director of financial sector strategies at ShareAction, a nonprofit that promotes sustainable investing, said: “We want fund managers to put their colors front and say, ‘ It’s sustainability for us ”. Then, as a customer, you will hopefully be able to better decide whether it works for you or not.
How durable is it?
As sustainable investing explodes in popularity around the world, developing and adopting standards is a global imperative. The industry needs a comprehensive framework to provide a true apples-to-apples comparison that will allow investors to weigh one investment against another. Otherwise, investors will have to wonder and guess how sustainable any investment really is. SFDR is an opportunity to provide better measurement of the performance of companies and funds according to sustainable investment criteria and must be extended to the United States and beyond.