Just because there’s noise around responsible investing doesn’t mean there isn’t substance. But the biggest risk to the movement right now is greenwashing by asset managers and others that’s taking place out there, every month, every day. While the intent is not malicious, it undermines the foundations of a movement that is genuinely starting to show results and offer a progressive alternative to the limiting paradigms of yesteryear.
Greenwashing is so dangerous because it destroys trust among asset owners and scheme members. There’s a solution, it will be tough to implement, but hear me out.
Greenwashing is putting at risk recent years of real progress. In the last 2 years we’ve seen 3 board members replaced at Exxon, we’ve seen Unilever, Tesco put in place new stronger targets on unhealthy food sales and the Say on Climate[1] votes movement now become standard at many large companies, all thanks to support from managers including Legal & General, NinetyOne, BMO, Aviva as well as others being co-ordinated by groups like Share Action and Climate Action 100+.
As much as I hated Tariq Fancy’s rambling and self-indulgent opus on this issue I admit through gritted teeth that he had a lot right about this, during a period of time when I was still giving managers the benefit of the doubt (he also left a lot out, which was well addressed by Professor Alex Edman’s putback).
Greenwashing away trust
What is greenwashing? Really it comes down to two things. Type 1 is overpromising on claims of return, risk or impact when that’s not justified by evidence. Type 2 is about inflated claims on what an organisation is actually doing on responsible investing: saying great things when really it’s business as usual. A vague commitment to something-or-other with no binding targets or guidelines . An example here being the once-popular but now frowned upon phrase “ESG integrated” which is really just meaningless boilerplate now.
Type 1 Greenwashing makes the job of every responsible investment professional trying to make an evidence-backed , balanced and realistic case so much harder , as you have to balance on a knife edge, fight back arguments on both sides: against both the sceptics and the greenwashers. It can feel like a lonely place and weakens the appearance of your arguments. We need the space and cover for a more realistic and balanced debate but the greenwash denies that, drowns it out.
Type 2 greenwash also makes responsible investment work far harder as the expertise, resources and time needed to try and properly evaluate manager RI practices is absolutely huge in a world where you have hundreds of managers all saying great things.
Tom Gosling, executive fellow at the London business school calls it the curse of BSG
Confirmation bias, uncritical thinking and mixed/woolly arguments are rife when it comes to looking for evidence of claims.
For example, studies are frequently quoted to support the outperformance of responsible investing approaches. The actual evidence from the best and most recent robust meta-studies is mixed[2]. It doesn’t support bold claims that responsible investment will outperform. Actually it shows something that could be more powerful if presented correctly: that the performance of responsible investment is indistinguishable from the wider market. Which, if we can then build a case on the risk, and impact pillars, ought to give us confidence that we are not harming returns. Instead, the weaker argument for outperformance is often used.
Stop the Greenwash
It is great to see Greenwash being firmly rejected more broadly for example with the recent accusations of greenwash being levelled at HSBC by the Advertising Standards Agency. GreenWatch are doing important work here in the corporate space (recent article in The Actuary). So too is the organisation AdNetZero. Professor Paul Watchman has been doing important work in the legal sector. We need to see far more focus on this in the financial sector.
Senior responsible investment professionals throughout the asset management industry need to think like an asset owner and start to take personal responsibility for the greenwash coming out of their own organisation – be prepared to “own” every claim personally and stop tacitly accepting a bit of greenwashing as the price of real progress, it’s far from harmless.
Let’s take a step back, how did we get here …
The asset management industry is wired to compete, not collaborate. Wired to want to be contrarian, to be different, have the best model, the most unique insight, the best new must-have fund and then to sell the hell out of it. Nothing fundamentally wrong on that, but it works counter to some of the best areas of responsible investment (which is inherently collaborative).
When it comes to responsible investment collaboration gets results: just look at the progress that climateAction100+ has made – an organisation supported by over 600 separate investors responsible for $60trn in assets has now secured Net Zero targets at over 110 of the world’s largest 160 corporate emitters (just 5 such targets existed in 2018, at the organisation’s launch). These Net Zero targets are estimated to reduce global emissions by the same scale as China’s total emissions by 2050.
A lot of this was achieved by investment professionals working together on the gradual process of engagement, not running around yelling “hey here’s a new fund, (and it’s the bestest greenest fund you’ve ever seen)”.
To cite just one more example, the fantastic progress that the IIGCC has made in putting together detailed, practical guidebooks for how to run a Net Zero investment program[3] which run to hundreds of pages has been made possible by the collaboration of responsible investment professionals across many different managers doing the hard work.
Performance and win-winism
The art of marketing is of course putting a positive spin on anything and for the investment industry this is particularly so. Where this manifests in damaging ways is when managers make inflated claims based off limited data and overpromise on what they think will sell a product – performance – rather than what actually matters. Marketers in particular are drawn to happy but overly simplistic win-win-ism, thinking that makes the case stronger when it makes it more fragile. We end up with too much fuzzy, friendly language and confused, mixed arguments. Anyone who insists on an evidence based approach is rightly going to get disengaged and push back on the whole lot.
The system favours sales not independent thinking
There’s been a real hollowing out of the investment industry – particularly in the UK – while the broad pension system is fragmented and beholden to platforms and providers, packed with sales people chasing the next deal to grow their revenue and light on deep independent thinkers acting on behalf of the investors they serve.
This all leads to glossy marketing underpinned by overstated, refutable claims about the efficacy of responsible investment that add fuel to any sceptical fires and undermines trust in the whole thing – potentially fatally.
… and that’s a problem
The result is that reasonable people who might otherwise be brought along with a more balanced approach instantly see through the superficial headlines and woolly arguments and sense this is too good to be true, they turn fully sceptical on any and all claims put forward by anyone connected with responsible investment, dismissing it all as marketing puff to sell funds. So they jam the brakes on, or at worst switch off entirely, halting or stopping progress. I see and hear this happening absolutely all the time.
Let’s have some real talk – what’s sustainable?
Let’s take just one example, the terminology “sustainable”. There’s actually no such thing as a sustainable fund. There, I said it.
Think about it for a second – is there really a single listed company out there that’s fully sustainable, once you take into account emissions, pollution, waste, biodiversity, supply chains, forced labour, exploitation of communities, consumers and workers? There isn’t.
The CEO of Patagonia, by all accounts one of the world’s MOST sustainable companies recently wrote in the Times that they can’t yet be considered sustainable. If they can’t, then pretty much no-one can.
A quick search on Morningstar revealed over 3,000 funds with the word “sustainable” in the name. So we have 3,000 sustainable funds but no sustainable companies for them to invest in? In fact it’s even worse than that, most “sustainable” funds actually hold pretty much the entire spectrum of companies (even some of those listed as EU “article 9” compatible). So effectively the funds industry has deemed every single listed company to be sustainable. You can see why people get skeptical!
But, I’m actually really bullish on the future of more sustainable / responsible investing. Despite all the fears of hype and bandwagons, there’s substance to it and it’s energising to be at a turning point where the existing multi decade shareholder primacy paradigm is genuinely on the table for change and a more progressive alternative that corrects some of the serious shortcomings of the past is within reach. There’s a huge amount of good to be gained for individuals, for communities and yes, investors.
There’s the real potential of a world where corporations don’t rack up huge environmental costs by destructively extracting and selling natural resources, by pumping out emissions and pollution into our seas and rivers because of defaulting to wasteful resource choices, and don’t lobby frantically behind the scenes to remove inconvenient laws and block progress at every turn.
Where corporations don’t foster inequity through exploiting and holding-back of vulnerable and precarious workers while paying CEOs vast fortunes, don’t foist ill-health on societies through junk food promotion and sales and don’t endanger marginal communities through dangerous practices like tailings dams.
Where corporations actually create value through initiatives aimed at benefiting a wider group of stakeholders. That’s a better world to live in and yes, a more economically productive and potentially profitable one. That’s no empty win-win-ism but a realistic goal. Professor Alex Edmans laid out a blueprint for such a future in his excellent book: Grow the Pie. His fantastic Ted talk is below.
It’s not a world where we rely solely on governments to regulate while pursuing laissez faire markets and offsetting pollution or child labour in one part of our investments with donations in another (sounds ridiculous, but happens all the time).
It’s not a mythical world where investors can save the world all by themselves with minor tweaks to their portfolio while earning fantastic extra returns. But neither is it a world where investors are faceless powerless technocrats pushing around numbers on a spreadsheet waiting for government to tell them what to do.
It’s a world of partnership between governments and private sector with companies and investors each recognised as the key influential systems players and powerful institutions they are (we started to see a glimpse of this at COP26 with the presence of the GFANZ initiative alongside government).
The financial sector is both a key transmission mechanism for policy in this area as well as an influential grouping of institutions in the context of the broader economy and society. Decisions taken in the financial sector by investors such as benchmarks and mandate guidelines impact in the real world and can have a bearing on systemic risks. Asset owners can’t change the world by themselves but they do have multple significant points of direct and indirect leverage that can be applied to drive change (this is discussed in detail in an excellent recent report by the Net Zero Asset Owners Initiaitve: The Future of Investor Engagement)
If only we had a system where corporates answered to their investors …
Some good news! We don’t need to invent a system where investors have influence over corporate behaviour – that already exists. We just need to re-awaken some long-dormant activities and make them relevant to a world of systemic risk – like for example, voting. Just last year 18 very reasonable shareholder resolutions[4] on things like tobacco marketing to underage consumers, restricting anti-climate lobbying, disclosure of environmental pollution failed at large companies when the support of just one more large asset manager would have been enough for them to pass.
Many asset managers routinely continue to support the sorry status quo in oil and gas firms for example – rolling over billions of pounds in debt financing to be ploughed into new projects like coal fired power stations and re-electing the board at firms not making the slightest effort to think about and disclose their environmental footprint. Firms who, if you just took into account their impact on the environment and communities[5] would go from making vast profits to printing vast losses.
And lets not let investment consultants off the hook here either, this piece by Vibeka Mair at Capital Monitor was broadly right: consultants are hugely influential and can determine what gets focused on by the choice of agendas, their mindset and even throwaway comments, but many are lacking in Responsible Investment knowledge, anchored to outdated frameworks and often churning out the same old same old they have for the last decade or more.
Even where knowledge exists it doesn’t consistently find its way into every client advice team. Consultants have the power to exert influence through the investment supply-chain and enforce common standards, but often fail to consistently do this.
They can also be guilty of greenwash, often of one of the most damaging kinds: by providing “fig leaf” cover for clients to continue investing in the same old unsustainable ways. Some superficial review or warm words to reassure clients that everything’s fine and move on.
The pay-to-play conference and media space also bears some responsibility giving anyone who’ll pay a platform to spout off unscrutinised green claims till the cows come home. That’s actually damaging for them in the long term as we’ve ended up with entire conference schedules so obviously packed with greenwash that it’s an instant turn off.
One obvious problem here is where no-one wants to try and hold anyone else to account because all parties are worried that they themselves are a bit guilty or will look bad. Reminds me of cycling’s infamous “omertà” in the 90’s/2000’s. It’s a real problem. I’m fortunate to have enough of an independent platform to say these things, I know many people who probably agree but feel too constrained by their employer to say so.
But all this could change. We need asset managers to think more like asset owners and good stewards and less like providers flogging the latest fund product. We need end asset owners, and consultants to be stronger in enforcing higher standards of accountability.
How?
To start, names do matter. Please no more sudden renaming of funds to include the word sustainable (hello large, UK listed asset manager, I see you), You’re not fooling anyone, and you’re undermining the whole idea of sustainable investing. But that’s just one example.
Taking responsibility seriously
Senior responsible investment professionals at asset managers have the knowledge, skills and mindset to make this all happen (I know many of them) crucially, in recent years two additional things have changed:
- They now have the resource to make a real difference (more than half of asset managers tell us[6] that one in every twenty of their entire investment staff are now a responsible investment expert)
- They now – in theory – have the senior level support (two in three manager tell us a board member has direct accountability for their responsible investment program).
But they frequently in practice lack the executive authority, coalition of support and direct access to portfolios and levers of power to get change into portfolios. And – this one is going to sting a little – in an industry riddled with stuffy status quo, warm words and fragile egos they often lack the bravery to have the tough conversations and take a stand that make real change, or have had it drilled out of them through institutionalisation.
CEOs and boards could help here by not expecting senior RI professionals to simply be the head salesperson of the new range of sustainably-badged funds, but recognise they will probably need to fundamentally challenge significant areas of the business, not just sprinkle a little stardust and green gloss onto the flyers. Be ready and open for that challenge. And yeah, sometimes it’ll hurt a little.
Seven steps to less greenwash
- Ensure all claims are clearly defined not vague and sweeping
- Evidence backed; ask the question, what’s the evidence for this. Be analytical about it – avoid friendly statements
- Use independent evidence sources wherever possible and be transparent
- Resist confirmation bias: apply critical lens to confirmatory data
- Get to grips with concepts like statistical significance and controlling for other factors when presenting conclusions
- Place facts and claims in proper context, don’t cherry pick – in particular Stewardship claims of voting at thousands of meetings and meeting hundreds of companies are usually presented out of context with no feel for the size of portfolios or number of companies held
- Don’t overpromise on impact: make any promises bounded, realistic and measurable
People often jump to the possible role of regulation here. Sure, maybe it can help. Green taxonomy, CFA reporting standards[7]. Fine. Regulation almost always becomes box ticking in our industry, and takes years of consultation and discussion to even get launched. I take the view that individuals taking personal responsibility is more powerful – people power gets things done.
Industry “self-regulation” initiatives such as the ICSWG[8] and the NZAMI[9], do show a little more sign of developing into a framework of common standards that moves us forward. For example the NZAMI progress report of December 2021[10], catalogued the detail and substance behind Net Zero programs of some of the largest asset managers.
My firm, LCP, recently announced that all buy-rated managers will now need to be NZAMI signatories to continue being buy-rated. If more consultants joined that push it would have far more power. It’s an example of the power of common standards.
Responsible sales professionals (yes, they exist too) have an important role too. They ought to push back on weak marketing lines and challenge their teams to better understand sustainable investing and how they can describe their firm’s efforts, be honest on shortcomings and what’s a work in progress. Sales professionals have a key role as they are frequently the main conduit point of contact between an asset manager and their current and prospective clients. They can play a role in shaping an asset manager’s outward message not simply being the carrier. More honest, balanced, conversations on this will actually afford them greater credibility with fund researchers and buyers compared to the eye-rolling and avoidance which accompanies much responsible investment work today.
If you liked this you might also like the Good the Bad and the False, addressing nine arguments against ESG.
I’m bullish on sustainable investing, but we’re not yet heading in the right direction. Members and savers deserve better. The solution isn’t regulation, but personal responsiblity. Always was, always will be. Which brings us to the question, what can YOU take responsibility for?
And now, for your musical outro, I present D;Ream…
[1] https://www.sayonclimate.org/
[2] Atz, Ulrich and Liu, Zongyuan Zoe and Bruno, Christopher and Van Holt, Tracy, Does Sustainability Generate Better Financial Performance? Review, Meta-analysis, and Propositions (August 31, 2021). Available at SSRN: https://ssrn.com/abstract=3708495 or http://dx.doi.org/10.2139/ssrn.3708495
[3] https://www.iigcc.org/resource/net-zero-investment-framework-implementation-guide/
[4] ShareAction Voting Matters report 2021: https://api.shareaction.org/resources/reports/ShareAction-Voting-Matters-2021.pdf
[5] Impact weighted accounts initiative
[6] LCP RI survey 2022
[7] https://www.cfainstitute.org/-/media/documents/ESG-standards/Global-ESG-Disclosure-Standards-for-Investment-Products.pdf?
[8] Investment consultant sustainability working group
[9] Net Zero Asset Managers Initiative
[10] https://www.netzeroassetmanagers.org/media/2021/12/NZAM-Progress-Report.pdf
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