When it comes to sustainable finance, we’re still on the frontier of the Wild West. It’s a place of untold potential, romance, chaos and the vast unknown. As the climate crisis unfolds, interest from investors in this fertile ground is reaching fever pitch. Yet the current green rush has the potential to turn into a monumental greenwash unless it’s tamed soon. Luckily help is at hand.
“To be sustainable, we need to define sustainable,” says Adam Matthews, director of engagement at the Church of England Pensions Board, and therein lies the crux of the issue. There are certainly more than 50 shades of green finance, wrapped up in buzzwords, glossy brochures, soft-focus images and claims that a product is ethical. But it can be fool’s gold.
For instance, there is a low-carbon fund which includes holdings in companies that own some of the largest coal and oil reserves on the planet.
“One company we analysed advertised an ethical portfolio when 96 per cent of its assets were in UK government bonds; just 3 per cent were in an ethical fund. This is not a one-off case either,” warns Barnaby Barker, investment analyst at SCM Direct.
“Unfortunately, the regulator, the Financial Conduct Authority, is repeatedly failing to heed the warning signs of what could turn out to be the next huge mis-selling scandal.”
In the wake of greenwash comes “impact wash”, a new tendency for funds to label anything they do as contributing to the United Nations’ Sustainable Development Goals. “When in fact there are really no new or additional positive environmental or social impacts about the way they’ve allocated their capital,” says Narina Mnatsakanian, director of responsible investment at Kempen.
No green gold standard yet
This sustainable financial quagmire is bogged down by a lack of quality data and benchmarking, as well as transparency. “The industry lacks a consistent set of global standards for green investments. Investors cannot make assumptions about what companies may be included in products labelled as ESG [environmental, social and governance], sustainable or low carbon,” says Lihuan Zhou, associate with the Sustainable Finance Centre at the World Resource Institute.