percentage of worldwide assets in ESG funds globally
Source: Refinitiv Lipper
10%
As the world’s financial firms embrace environmental, social and governance (ESG) investing, there’s controversy that they’re labelling their activities as green or sustainable solely to attract business. There’s huge commercial pressure to do so, as interest in ESG funds is growing.
amount poured into ESG funds in 2021/2022
Source: Refinitiv Lipper
$8,800 bn
Indeed, riding mainly on concerns about global warming, assets under management in responsible investment funds reached more than $8.8 trillion globally in 2021 (through to the end of November), according to Refinitiv Lipper. Since then, however, they have edged lower in 2022’s harsh market environment, due mainly to falling asset prices but also some outflows. At the end of July 2022, assets under management stood at $7.03 trillion, down more than 20% on the year.
Distinguishing Green Fact from Green Fiction
The Double Materiality Concept
The How of Sustainability
The broad ESG investing spectrum
At the heart of greenwashing concerns, there’s confusion over what it means to be sustainable or green. For example, many investors think of sustainable, ESG, green and climate investing in terms of what their investments do for the environment and society. They think of investing in green assets such as wind farms, in climate solutions such as electric vehicles, and in companies with environmentally and socially friendly products and services such as plant-based proteins or life-saving treatments. However, many investment professionals think in terms of risks and opportunities. For example, they think of how resilient their investments are to a changing climate, how significant business opportunities arising from climate solutions may be, and how good companies are at managing product safety issues.
Yet the problem of greenwashing is partly the result of ambiguity and varying definitions. That’s fertile ground for misunderstanding and, in some cases, even misrepresentation. It can be hard to distinguish between fact and fiction.
Fiduciary Duties and Greenwashing
But as the world heats up they see the urgent need for an orderly and just energy transition. How we facilitate that transition and who pays for it is the subject of much disagreement, and it is these questions that are driving the confusion over definitions. Pragmatists argue that allocating capital to purely green assets will not hasten an orderly or just transition to a decarbonized world. Others balk at the idea that natural gas or blue hydrogen can play a vital role in facilitating the transition to a low carbon future.
Pragmatists accept that mothballing fossil-fuel energy systems and switching on renewables is not going to happen overnight.
This may be with the goal of understanding the impact of systemic risks on a portfolio’s financial performance or to achieve a sustainability outcome such as improving access to clean water. This broader focus is driving an increasing demand for greater non-financial information and transparency, and therefore consistency of these disclosures is crucial if they are to be of any value to either financial or sustainability outcomes – and avoid the risk of greenwashing.
Increasingly, asset owners and asset managers are looking beyond the impacts of ESG risks on their portfolios to understand how companies impact the economic, social, and environmental systems around them – a concept known as double materiality.
This is at the heart of the greenwashing confusion. Sustainability “purists” on the one hand argue green means financing companies that provide credible climate solutions from wind farms to green hydrogen developments. For them, green means real-world impact now and nothing else will do. At the other end of the spectrum are the “pragmatists” or sustainability incrementalists.
The second major debate – one that is currently raging in Europe – is about the “how.”
Greater than 99% consensus on human caused climate change in the peer-reviewed scientific literature - IOPscience
Natural gas or blue hydrogen can play a vital role in facilitating the transition to a decarbonized world, and thus allocating capital to these so-called brown assets is an important element of meeting the Paris goal of limiting global warming to 1.5ºC above industrial levels.
The reality is a broad spectrum of investors (from those seeking to mitigate ESG risks, to those with sophisticated approaches on ESG goals and preferences) are all seeking to navigate the best ways forward.
In this complex and rapidly evolving landscape, there is a need for asset managers to help clients select the right sustainable investments by promoting transparency (with regard to climate as well as wider sustainability disclosures), developing expertise, resources, tools, and organizational structures to support ESG strategies, as well as building trust, and acting with integrity to protect clients from misleading marketing claims.
While ESG investing has been vaunted as key to decarbonization of the global economy, it’s not a clear or straightforward path.
The important thing in ESG investing is that asset managers are clear with clients about what can and can’t be done. All investment strategies make trade-offs and ESG strategies may trade off risk-adjusted returns against sustainability outcomes. It is vital – for clients as well as the wider industry – that everyone understands what these trade-offs may be and their possible costs so that clients are able to choose the right strategies to meet their expectations.”
Eugenia Jackson
Global Head of ESG, PGIM
Global Estimated Net Flows ESG Funds - Asset Type
01 - 2020
02 - 2020
03 - 2020
04 - 2020
05 - 2020
06 - 2020
07 - 2020
08 - 2020
09 - 2020
10 - 2020
11 - 2020
12 - 2020
01 - 2021
02 - 2021
03 - 2021
04 - 2021
05 - 2021
06 - 2021
07 - 2021
08 - 2021
09 - 2021
10 - 2021
11 - 2021
12 - 2021
01 - 2022
02 - 2022
03 - 2022
04 - 2022
05 - 2022
06 - 2022
07 - 2022
-150
-100
-50
0
50
100
Commodity
Equity
Mixed Assets
Money Market
Other
Real Estate
Alternatives
Bonds
Mutual Funds (including Fund of Funds) and Exchange Traded Funds (US$ Billion)
Source: Refinitiv Lipper (as of July 2022)
Confusion around the meaning of ESG
1
Chapters Menu
There remain many debates in the world of ESG investing that have led to the current confusion. One is about fiduciary duties: Do investors have the legal right to allocate and steward capital to tackle societal challenges such as climate change?
Financial return is the primary goal of most investors and where an ESG risk poses a threat to financial return, many jurisdictions around the world not only allow but increasingly require investors to consider those risks and act accordingly.
Whether investors can legally pursue over-arching sustainability goals – such as the broad international objectives within the Paris Agreement and the UN Sustainable Development Goals – is still moot in many jurisdictions, but a cultural shift towards thinking about fiduciary duties in a broader systemic context is under way and asset owners are increasingly stating that earning a financial return is not their only investment goal. For example, the UK’s Church Commissioners, which manages the Church of England’s endowment, states that it has a duty to invest in a way that benefits the wider world.
Source: Church Commissioners For England Stewardship Report 2021
Source: IOP Science
01 - 2020
02 - 2020
03 - 2020
06 - 2021
04 - 2020
07 - 2021
05 - 2020
08 - 2021
06 - 2020
09 - 2021
07 - 2020
10 - 2021
08 - 2020
11 - 2021
09 - 2020
12 - 2021
10 - 2020
01 - 2022
12 - 2020
02 - 2022
01 - 2021
03 - 2022
02 - 2021
04 - 2022
03 - 2021
05 - 2022
06 - 2022
Mutual Funds (including Fund of Funds) and Exchange Traded Funds (US$ Billion)
Source: Refinitiv Lipper (as of July 2022)
-150
-100
-50
0
50
100
Alternatives
Bonds
Commodity
Real Estate
Mixed Assets
Money Market
Other
Equity
04 - 2021
05 - 2021
-50
0
50
100
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