Impact Investing Conference

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The ESG Landscape: Green, Not ‘Greenwashed’ | PLANSPONSOR PLANSPONSORThe ESG Landscape: Green, Not ‘Greenwashed’ | PLANSPONSOR PLANSPONSORThe ESG Landscape: Green, Not ‘Greenwashed’ | PLANSPONSOR PLANSPONSOR

Impact Investing Forum 2024

London. April 24-25, 2023.

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Retirement plan sponsors and investors are likely to be concerned about “greenwashing” as they consider sustainable investments. Jay Westerveld, an environmentalist, first used the term in 1986. He claimed that a hotel requested its guests to reuse towels to save the environment, but in reality it was to save money. The meaning of “greenwashing” has expanded to include making exaggerated and misleading environmental claims, sometimes without providing significant environmental benefits in return. According to Quilter Investors, 44% of respondents said that “greenwashing” is their biggest concern when it comes environmental, social, and governance (ESG), investing. However, S&P Global stated that such fears are not based on any evidence. There “seems to be little evidence [the practice] has become widespread in reality,” it wrote, also indicating that the maturing of the market, stakeholder demands and institutional efforts have been bringing this to bear.Still, the comment mentions a sprawl of complexities a sponsor needs to sort through, many of which make it hard to compare investments or gauge their sustainability quotient: various inconsistencies–from how funds are labeled to “what [even] constitutes a ‘green’ or ‘social’ project”–also poor transparency, no standard measures for performance or reporting, no regulation, and a burgeoning demand for ESG products.Uncertain Numbers”The mainstreaming of ESG investing has had a galvanizing impact on how sustainability factors are incorporated into investment decisions, including at the financial instrument level,” wrote S&P Global, estimating that “sustainable bond issuance, including green, social, sustainability and sustainability-linked bonds, could collectively exceed $1 trillion this year–a near five-times increase over 2018 levels.” It said that this is assuming that the total numbers reported and totaled are reliable. S&P Global estimated that “sustainable bond issuance, including green, social, sustainability and sustainability-linked bonds, could collectively exceed $1 trillion this year–a near five-fold increase over 2018.” It also found that 72 funds were not aligned with the Paris Agreement goal of limiting global warming well below 2 degrees Celsius. The contaminated funds had more than $67 billion in assets. “It’s very difficult for investors to accurately ascertain whether funds branded [as climate focused] are actually Paris aligned or not,” InfluenceMap analyst Daan van Acker stated. The S&P comment noted that “Journal of Environmental Investing Report 2020”, which cited “over 20 different labels [such as green bonds or ESG bonds or climate awareness bonds] being used for sustainable debt instruments, all of which align with different [ESG] frameworks and guidelines.” The comment refers to the Climate Bonds Initiative findings. It also states that investors may not be sure if proceeds from a green bond, which is intended to finance new projects are actually used for that purpose or make an impact. S&P Global stated that performance standards are not met or are too low. Many issuers do not report results. It also noted that many investors are unsure if proceeds from green bonds are used to finance new projects. Issuers of bonds are more likely to measure their financial impact in terms of “dollars expended, loans issued, number or participants in hospital beds added,” which ignores the human component of how much social outcomes were improved. COVID-19 also led issuers to abandon credibility-building procedures to push for funds to–hopefully -finance the discovery of a cure or vaccine. The comment stated that tracking and disclosure procedures need to catch up. Transition bonds are sold to companies who want to adopt ESG practices, but need financial assistance to finance them. S&P Global says that “washing” here could obscure the fact a project funded might not do much to reduce a company’s carbon footprint or, in some cases even increase it. For example, if a company had to move or build new plants. S&P Global stated that some issuers may be criticised for not being ambitious and having weak or superficial sustainability obligations. These commitments could have a negative impact on corporate or national greenhouse gas-emissions goals. According to Dealogic, only 16 transition bond deals had been recorded as of June 2021. S&P Global continues to credit investors with scrutiny for the progress in transparency, robustness, and credibility of its sustainability commitments. The firm says that entities are no longer able to simply state their sustainability goals and long-term targets. Stakeholders expect companies to produce detailed transition plans that are supported by data and short-term interim targets. This will demonstrate a strong commitment to a more sustainable future. Ultimately, we believe that companies that can substantiate their environmental claims, and align financing with a business strategy rooted in long-term ESG goals, will be better fit to withstand potential reputational, financial, and regulatory sustainability-related risks that will evolve over time. “A Push for Standardization, AccountabilityS&P Global says work is already underway to bring uniformity, clarity and accountability to the ESG market.For one effort, the International Capital Market Association (ICMA) and the Loan Syndication Trading Association/Loan Market Association/Asia Pacific Loan Market Associations launched a set of voluntary principles “to promote standardization and transparency for use-of-proceeds and sustainability-linked bond and loan markets”–and the uptake has been good, with an estimated 97% of use of proceeds and 80% of sustainability-linked bonds issued globally adhering to them in 2020, according to ICMA and Environmental Finance.Much work is also being done in Europe. S&P Global stated that the European Union’s Taxonomy Regulation is “a major step in creating an unified language [for] sustainable and promoting greater availability, reliability and disclosures to investors to ESG data and disclosures for other stakeholders,” and that issuers would need to report in detail how bond proceeds are allocated and how funded projects align with the taxonomy.

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ESG Investing Conference