Mounting calls for ESG crackdown amid false claims

Global sustainable investments are estimated to range between $35tn and $40tn. Amid mounting concern that only a fraction of such assets are bona fide environmental, social, and governance” (ESG) investing, there are calls for tougher regulations to stamp out the false claims by fund managers.Matt Patsky, who introduced the world’s first “green-chip” index of socially responsible companies in 1994, estimates that of the $35tn that the Global Sustainable Investment Alliance says is parked in sustainable investments, less than $1tn is in “real” ESG. Such warnings are becoming more frequent as the mood around ESG shifts. Some industry insiders have levelled allegations of greenwashing against their former employers. And asset managers are starting to review how they label and sell ESG funds to avoid being named and shamed. Positively, policymakers are rising to the challenge. The US and Europe could have an identical set of rules that determine what counts as green investment.China is also working with its European counterparts to announce a common green taxonomy this year, to define and classify green projects. That’ll be in focus at the Group of 20 meetings in Rome on October 30-31.Make no mistake, the demand for ESG products is surging.Governments, corporations, and other groups raised a record $490bn last year selling green, social, and sustainability bonds. A further $347bn poured into ESG-focused investment funds: An all-time high.Moody’s Investors Service expects sustainable debt issuance to reach $650bn this year, while money flows to ESG funds show no signs of slowing.BlackRock, has put its $8.7tn heft behind a powerful message: The decades ahead will be defined by minimising emissions, requiring an overhaul to everyone’s business models.Even with market guidelines and third-party reviewers to ensure stricter ESG compliance, many investors are still questioning whether companies are disclosing enough to justify the rating or claims they make. Many companies have tied their borrowing costs to ESG targets, for instance, but the private nature of the loan market allows them to hide their performance results from the public eye. Social and governance aspects have grown to be just as crucial as companies’ environmental efforts, especially with the MeToo and Black Lives Matter movements that affect consumers’ behavioural spending. Many corporations are using their annual sustainability reports to showcase how fair they are in equality employment or what they did to improve employee well-being. Given some of these goals are not measurable, there’s a risk of overstating the results. BlackRock, for example, settled a discrimination lawsuit in July 2021. For sure, there are some ways to check on the ESG claims. The European Union has proposed a European Green Bond Standard, which could be applied to other types of ethical debt such as sustainability-linked issues or social financing.Third-party rating companies can also provide some assurance that green bonds are doing what they say they are. All of this detective work would be easier if investors and the public had a standardised approach and robust set of data to compare. Patsky’s checklist for being a serious ESG investor includes pressuring corporate executives to change their companies’ behaviours, filing shareholder resolutions, and voting on those filed by others.