Investors’ concerns about widespread greenwashing, or misleading environmental claims made by portfolio companies and fund managers, may be overstated, according to a report from ratings agency S&P Global Ratings.
The report noted, “That the sheer volume of ESG marketing and labelling, in combination with non-uniform sustainability commitments and reporting, has made it increasingly difficult for stakeholders to identify which claims are trustworthy and reliable and which are unreliable—or, in industry terms, ‘greenwashed.’
However, it added, “While there are increasing concerns that these potentially misleading practices are taking place, there seems to be little evidence that they have become widespread in reality.”
The rating agency blames a dearth of reliable and comparable ESG metrics and reporting for creating continued confusion in the ESG space.
It said that the market for ‘sustainable’ bonds is “highly unstandardised and fragmented” across issuer types and regions, with no common standard or enforcement mechanism for ESG disclosures at the instrument level.
This includes how the proceeds of ‘sustainable’ bonds were used, and the impact of the projects financed.
Worries over greenwashing are far from new but they have mushroomed alongside the explosive growth of ESG investing. S&P predicts that global issuance of sustainable bonds, including green, social, sustainability, and sustainability-linked bonds alone could collectively exceed $1trn in 2021, a near-fivefold increase over 2018 levels.
Meanwhile, numbers crunched by PwC predict that assets in sustainable investment products in Europe will reach €7.6tn by 2025, outnumbering conventional funds, as investors’ growing focus on risks including climate change and social inequality pushes these strategies into the mainstream.
The S&P report pointed out that it is not only consumers and investors who are holding corporates and fund managers to account. Governments are also playing their part.
It said that the UK government is studying the country’s energy retail sector to investigate whether companies are engaging in greenwashing over electricity tariffs.
In Europe, the market is looking to standardisation and new regulations—including the Sustainable Finance Disclosure Regulation, or SFDR, which mandates ESG risk disclosures; the EU Green Bond Standard, which proposes strict new definitions of what the bloc characterized as “gold standard” sustainable debt; and the Taxonomy Regulation, a classification system for environmentally friendly economic activities—to make it difficult for players to cheat in the game.
©Markets Media Europe 2021