Forget about labels – greenwashing is grimmer
Pardon the Interruption
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A growing proportion of asset owners are publishing their climate reports and targets. The UK’s Financial Conduct Authority (FCA) is working on Sustainability Disclosure Requirements (SDR) and investment labels. The UK Treasury is working on the regulatory regime for ESG providers. It sounds like institutional asset management is about to solve the greenwashing problem once and for all, doesn’t it? Unfortunately, the reality of greenwashing is much grimmer.
Five years to hit net zero – but fossil fuel subsidies are growing
Recent research shows that only another 250 gigatonnes of CO₂ remain in the carbon budget consistent with 1.5 degrees of global warming. The global level of emissions is presently 40 gigatonnes of CO₂ per year, and given these calculations are from the start of 2023, the time limit to achieve net zero may be actually closer to five years, i.e. 2028 and not 2050, which is what most institutional investors are aiming for. This is consistent with updated figures reported by the Intergovernmental Panel on Climate Change (IPCC).
At the same time, fossil fuel subsidies surged to a record $7 trillion last year, as governments supported consumers and businesses during the global spike in energy prices. Subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product, which exceeds the government spend on education and equals two thirds of the spend on healthcare. And while the taxes and exploration licenses paid by fossil fuel companies are putting money back into the global economy, they continue to release emissions.
Mandatory disclosures are not helping enough
Disclosure against mandatory indicators under the EU's Sustainable Finance Disclosure Regulation is significantly low across the 10,000 largest firms worldwide. Just 0.4% of firms report the share of non-renewable versus renewable energy consumption. A majority do not make any disclosures whatsoever against 12 of the 17 mandatory indicators. Only 22% of all firms reported their total greenhouse gas emissions, with that number falling as low as 14% in the US and just 3% in China.
In addition, the FCA has found that many firms are far from meeting its expectations ahead of the launch of the SDR rules and guidance. Products are inconsistently aligned with ESG and sustainability goals even if they are referenced in the product name. Fund holdings are inconsistent with objectives. Disclosures and stewardship approaches are below expectations.
Mandatory reporting has created a positive loop in UK pensions, which we hope will extend to insurance firms as well. The urgency around climate impact has helped shine a light on the opportunities it presents. This is increasing pressure on issuers via asset managers investing in them, who are in turn pressured by asset owners buying into their strategies. But so much more needs to be done – decarbonisation targets need to be substantiated and urgently accelerated.
Analytics designed to minimise greenwashing
mallowstreet's AI for presentation analysis SOFI has an ESG lens, but it does not give points for just talking about net zero. SOFI needs to hear you set a target and demonstrate what you are doing to achieve it. In particular:
- A sophisticated approach to ESG would focus on decarbonisation, sequestration, and actively investing in the countless opportunities provided by the climate emergency.
- Risk integration and ESG tilts have never been sufficient – and exclusions are not acceptable either, as we do not want to make decarbonisation just an accounting exercise.
- Active ownership and engagement are key, but they need to be followed up by provable results, action and voting in line with desired goals.
- A sophisticated approach to ESG is increasingly moving away from net zero to ‘net gain’ – away from reducing emissions to increasing sequestration, via nature as well as technology.
- Throughout it all, investors need to be scrutinising emissions intensity and producing data to back up all claims – all done in an unambiguous way.
Cutting through the ESG noise is difficult – but crucial
Too many ‘feel good’ headlines can leave the biggest experts fooled at worst and lost at best. This is why our approach to research, product design and content generation is so crucial. We do not blindly rely on our status as domain experts but lean on preliminary research based on thousands of data points from internal and external sources, carefully collated over the last five years. This allows us to produce surveys that challenge asset owners to improve, write reports that provide foundational content, and offer products that help investors maintain their credibility.
What are your thoughts on greenwashing and getting the right message out?
What are your thoughts on greenwashing and getting the right message out?
