While the financial sector is often accused of greenwashing, it is important to remember that responsible investments can only be made with truly sustainable companies. This is why sustainability reporting standards for companies are essential.
If the famous GIGO formula (“Garbage In, Garbage Out”) in IT indicates that poor quality data can only produce dubious results, the same reasoning can be applied to responsible investing. Indeed, only if companies’ sustainability information is reliable, transparent and standardized can sustainable investment achieve truly convincing results. In other words, only if there is real “green in” will there be “green out”.
Public criticism and regulatory standards
And there is an urgent need to improve the situation, as a growing segment of the population is blaming banks and asset management companies for their negative impact on our planet. Civil society would not only like to encourage the flow of capital towards the most virtuous activities in terms of sustainable development but is increasingly demanding that the financing of economic activities that are harmful to the environment or that use the common capital of all humanity be stopped. The pressure for a general divestment from fossil fuels is growing, to the point that an increasing number of pension funds and endowments are turning away from coal and oil. Even Norway’s sovereign wealth fund – ironic because it is the product of the country’s oil wealth – is considering excluding them from its portfolio.
But when asset management companies adjust their offer in depth to embrace sustainable management, they are then often accused of greenwashing i.e. communicating in a dishonest manner to make themselves appear greener than they really are. As it is often the case (but here it is really welcome), the authorities have reacted by imposing new rules to a sector that is already highly regulated. In March, the European authorities introduced their new Sustainability Finance Disclosure Regulation (SFDR) to improve transparency and combat greenwashing. [The UK, not to be outdone, is looking to implement its own classification and labelling system for sustainable investment products].
Asset managers act on behalf of their clients
However well-intentioned such regulatory initiatives may be, one is entitled to question the validity and, above all, the usefulness of this kind of pressure. It must be remembered, after all, that the financial sector acts essentially as an agent for investors. The latter are the true owners of the capital and have the ultimate responsibility for making moral choices about the way their funds are invested. Moreover, it should not be forgotten that index management, which has become hegemonic with the growing success of ETFs, implies by definition investing in all the companies in the underlying index and therefore not allowing for the exclusion of any of the companies that make up the index.
Exclude the bad or reward the good?
For many who are not involved in these issues, it is easy to make simplistic rules: “just” stop investing in polluting companies, in favour of clean energy providers, organic food producers and bicycle manufacturers. But the reality is obviously more nuanced. First of all, despite all our good will, we must admit that we cannot yet do without oil, cement, chemicals, road transport, paper or heavy metals. Excluding them a priori would therefore result in extremely unbalanced portfolios, leaving out whole sectors of our economies. It would also slow down the economic development of most emerging countries, which are still not very active in the tertiary sector and so-called clean activities. Finally, it would not encourage companies in the boycotted sectors to make efforts, since they would not be rewarded by an increase in their stock price. This could even push them to take their prices down and go to private markets, where the general public would have much less visibility and therefore control over the achievement of common objectives. This is why it seems preferable to favour the good performers, i.e. the companies that make the most effort to minimize their environmental damage and decarbonize their activities, even in sectors that are a priori polluting.
The need for recognized standards
To do this, however, it is essential to have a common benchmark that allows investors to make an informed and quantified choice between truly virtuous companies and those that are content with declarations of intent and empty promises. In this respect, it should be remembered that these difficulties of objective evaluation and comparison between actors from different countries were once the norm in the financial analysis of companies, until the appearance of standardized accounting standards. Today, financial reporting standards such as IFRS have become a reference in Europe and elsewhere, facilitating transparency and correct valuation of companies. This is why the announcement on 3 November at COP26 of the creation of the International Sustainability Standards Board is a major step in the development of responsible investment and the necessary transformation of capitalism towards a system in which the existence of a company would no longer be justified by profit alone, but rather by its total societal value.