Following the Money

Following the money: Are financial institution ‘green investments’ becoming a new example of greenwashing?

Since the landmark Paris Agreement, a legally binding international treaty on climate change, which was adopted by 196 parties on 12 December 2015, at the national level, United Nations member states have been attempting to manifest their commitments.

The primary objective of the Paris Agreement is to cap global warming to preferably 1.5º C with a maximum cap at 2.0º C with aims of reaching climate neutrality by 2050.

Of course, climate change initiatives do not exist in a vacuum and must co-exist with other aspects of our, largely, neoliberal global environment including finance, geo-politics, and national and local governance.

Financial institutions, financial investment; what’s the difference?

Broadly speaking in the general public realm, ‘finance’ is comprised of main disciplines of corporate finance, investments and financial institutions.

• Corporate finance – the division of a corporation that deals with how that company manages its capital, sources of funding, capital structuring, budgets, and operational flows. Think of the ‘accounts’ department of any business
• Investments – the sources of funding that a corporation receives. Investments may come from individual investors (retail investors), banks, government investments (in the form of grants, subsidies, etc) other private funding organisations, investment/hedge funds etc; and
• Financial institutions – the bodies concerned with the dealing of monetary transactions. These bodies include banks (Government owned central banks and private retail banks), hedge funds managers and brokerage firms, investment companies, mortgage, and insurance companies etc.

The average individual would have some exposure to many or all of these concepts in some form or another: savings in a bank, car or home insurance policy, mortgage to either a central or private bank, share-holdings in a corporation (perhaps even sitting in a Director or managerial position on a corporation’s Board), retail investments in companies or investments being managed by a broker or hedge fund.

We know our money is being leveraged by all financial institutions whom we transact with.

Majority, if not all, financial institutions re-invest our money in the free-market to not only turn a profit but to pay us back in dividends and interest and to ensure a functioning, growing and progressive global economic system.

ESG’s: Economic, Social, Governance criteria

Socially responsible investing is not a new concept, with ESG investing practices having been commenced in the 1960’s. Influenced by the United States’ civil rights movements and the boycotting of companies involved in or supporting the Vietnam War, ESG practices were created to assist investors in being able to receive information about and identify what stock holdings their investments were really in so they may re-direct to more economically, socially, and governmentally ethical investment choices.

Globally, the United Nations Environment Programme Initiative in the Freshfields Report of October 2005, coined the phrase ESG legitimising it even more on a global scale.

Now, nearly all corporations consider their ESG footprint and many countries’ corporate regulators regulate companies by their ESG ratings.

Re-iterating the shift in wider public normative systems towards businesses and practices that are economically and socially responsible in a myriad of contexts, including on climate change.

The importance of having a ‘good’ corporate ESG rating is ever prominent, especially as modern day individual retail investors are hyper-aware of where their money is being invested and the fact that they currently make up approximately 41% of all global assets.

Still, the majority of global assets at 59%, are held by institutional investments: a pool of funds (mixed with retail and corporate investors) managed by investment funds.

With increased interest in ESG principles, ESG funds are portfolios of investment instruments which factor in ESG considerations in their processes.

How true are corporate representations of being “green investments”?

A recent scathing report published by InfluenceMap, a London-based climate change think tank “accused the majority of green funds of falling short.”

InfluenceMap conducted an assessment of 723 equity funds with over hundreds of billions of dollars in assets and concluded that over 70% of the funds with ESG objectives are misaligned with global climate targets.

Further assertions include that over 50% of the ESG funds which self-describe as “clean energy” and “low carbon” do not reach the standards outlined in the Paris treaty.

These findings were supported by another report published by The Economist earlier this year that concluded some of the biggest ESG funds globally are “stuffed full of polluters and sin stocks,” which even prompted German and U.S authorities commencing an investigation into DWS Group, an asset-management tranche of global heavy-weight Deutsche Bank AG.

While there are certainly ethical implications to individuals who invest their money with these investment funds, the geo-political concerns are just as significant. Other reports also claim ESG investors hold billions of dollars worth of assets in military suppliers to Myanmar who have recently come under the spotlight for the death of 1,500 deaths caused by the ruling junta party and increase in funds in Russian backed corporations despite their contentious conduct towards Ukraine.

These various reports are an indictment against some green investments, characterising them as another example of “greenwashing” despite growing concerns on climate change and trouble geo-political relations.

The work from here…

Various international bodies, including the International Accounting Standards Board and International Sustainability Standards Board are now attempting to address these allegations of greenwashing and create meaningful progress in ESG sustainability.

This, by creating mandatory sustainability-related disclosure standards to emphasise accurate financial reporting and consistent practices, transparency and accountability across the financial investment industry.

On the ground, individuals either with their money already in, or are considering investing in, an ESG investment fund can try to conduct their own due diligence and research and maintain pressure on regulators and nation governments to ensure these issues remain policy priorities.

Sources

• Global Asset Management 2021: The $100 Trillion Machine | BCG
• Greenwashing Is Increasingly Making ESG Investing Moot: Green Insight – Bloomberg
• Sustainable finance is rife with greenwash. Time for more disclosure | The Economist
• InfluenceMap Climate Funds: Are They Paris Aligned?
• Financial Institution (FI) Definition (investopedia.com)
• The Evolution of ESG Investing – MSCI
• Sustainable financing and overcoming the risks of ‘greenwashing’ | Global law firm | Norton Rose Fulbright
• Many Green Funds Don’t Live Up to Their Claims, Report Finds | Time
• The Paris Agreement | UNFCCC

Images

• Timisu from Pixabay
• TheDigitalWay from Pixabay
• Brett Jordan from Pexels