Beyond greenwashing: a culture of superficial ESG regulatory compliance could set us back years

The sustainable finance industry has gone into overdrive: it feels like it is trying to run before it has learnt to walk

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“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident” – Arthur Schopenhauer, Philosopher

For those of us who started working in the space of ‘sustainability + finance’ some 20 years ago, the goal was always to redirect capital flows so that finance would make a positive contribution to sustainable development. We didn't call it ‘impact investing’ but having a positive impact on the world was always the driver – our phrase at that time was ’sustainable value creation’. We didn't have the Sustainable Development Goals, but the Millennium Development Goals essentially raised the same global challenges of poverty and environmental degradation.

But changing the system from within required some compromises; the most important ones being blending in, gaining acceptance, convincing, in order to rewire mindsets and corporate culture, often one person at a time. This took time. And heaven forbid that at any point in this process we would be perceived as wanting to ‘save the world’ – that would be a sure way to lose all credibility and end the conversation. 

So the language of ‘ESG’ evolved, neatly separating issues when in fact the real challenge of sustainable development resides in the fact that all these issues are interconnected and interdependent. We sought to re-define ’fiduciary duty’, thereby emphasising siloed responsibilities rather than collective responsibilities along the entire investment value chain. We re-interpreted ’alpha generation’, appealing to self-interest, as if sustainable development could be a zero-sum game of winners and losers.

The unintended outcome was that we then got pulled into endless debates about proving outperformance. We spent years making the business case. Truth be told, we lost ourselves a bit in the process, but we got the industry moving so that today we have a critical mass of insiders supporting this agenda within their organisation and willing to experiment. Sure, there was a bit of exaggerated marketing, but the intentions were mostly genuine.

Since the regulators stepped in with a clear focus on managing impact, the industry has gone into overdrive. At times, it feels like it is trying to run before it has learnt to walk. Take climate change for instance. Major commitments are being made about ‘aligning’ portfolios with Net Zero goals without a deep understanding of how to meaningfully measure the carbon intensity of portfolios (e.g. scope 3) or to effectively reduce them (beyond quick cosmetic gains). The obvious case is offsetting, which should be used as a last resort in situations where reducing emissions becomes too challenging. 

We then got pulled into endless debates about proving outperformance. We spent years making the business case. Truth be told, we lost ourselves a bit in the process, but we got the industry moving

This step change to focus on impact is needed, but now everyone is complaining about rampant greenwashing. I personally don't have an issue with firms making bold claims, and effectively raising the bar for themselves and the rest of the industry, as long as there is enough informed scrutiny within and around their organisations to hold them accountable for walking the talk. 

What worries me is that the new disclosure requirements (which regulators have introduced partially to prevent greenwashing) are creating a culture of regulatory compliance where sustainability impacts will be increasingly ‘managed’ superficially in order to make portfolios look good from an impact perspective. This would be disastrous and would set us back another few years – a luxury we no longer have. It would also be a distraction from what is really needed: for finance professionals to develop a sound understanding of what creates these negative impacts in the first place and how to tackle their root causes.  

So my three wishes for the industry for the coming years are: 

1. Make bold commitments but be honest about the challenges you are encountering as you try to progress towards your goals. Good examples include case studies by PRI signatories on implementing the EU Taxonomy or Axa Investment Manager's proposed framework for strategic asset allocation for a 1.5°C world.

2. Recognise that value is not created in isolation. Rather, all players operate in an interdependent ecosystem of value creation. So seek help, drive more collaboration, share success stories. And expect the companies you invest in to do the same in their respective industries. A good example is Shell's push for sector decarbonisation through strategic partnerships.

3. Understand that managing assets for the long-term often requires making difficult choices and trade-offs. Be transparent about what you prioritise, in what context and why. Where possible, try to find the ‘efficient frontier’ that reconciles different goals. A good example is the recent work of leading scientists to identify planetary boundaries that also consider human well-being and justice.

Finally, a bonus wish that is key to accelerating our collective progress: Invest in your people – your greatest asset – so that they are equipped, incentivised and empowered to do 1, 2 and 3 in their daily jobs. 

Cecile Biccari is Managing Partner at Contrast Capital

RI Co-Founder and Joint Managing Director Hugh Wheelan will be moderating an extended panel debate on ‘The State of ESG’ at the RI Europe conference on Monday June 14.