Greenwashing is a problem for the whole financial industry, warns Mike Judith in his essay for finews.first. ESG marketing is in full swing, leaving consumers in the green fog.

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

The debate about whether sustainability in financial products is a niche has died down. With regulators redirecting global financial flows, expansionary fiscal policies, and changing consumer demands, this is no surprise: sustainability is becoming a new norm.

But a major problem is that defined ESG guidelines have not yet been established and EU regulatory projects such as the Taxonomy, MiFID2 and the Disclosure Regulation have not yet been aligned. As a result, the analyses of sustainable research houses sometimes differ significantly.

Another problem is the marketing engine. Sustainability has now become so significant that – at least at first glance – there are hundreds of providers of green products.

«How many cases are still undetected?»

Many asset managers, banks, stock exchanges, data providers, or rating agencies did not have a single sustainable product a few years ago, but today they cast themselves as pioneers: where trillions of dollars are invested, many are eager to quickly transform themselves from grasshoppers to environmental angels in the public perception. ESG marketing is in full swing, leaving consumers in the green fog.

The case of an impact calculator, for example, which a fund company removed from its website after a consumer advocacy group demanded that it not be used, has raised doubts. Another major provider has come under fire for making sustainability claims about its funds. How many cases are still undetected?

«That's why public skepticism is growing»

I would dare to say that in the absence of uniform standards and due to different criteria, it would be possible to report critically on almost any investment product. The former chief investor of the largest U.S. asset manager even called ESG a «deadly distraction» from the solutions that are actually needed. That's why public skepticism is growing.

Why is it so hard to judge whether a company is operating sustainably? Here are three examples: A large beverage manufacturer reports low CO2 emissions - clearly: subcontractors handle the CO2-intensive logistics. E-commerce firms emit little CO2 themselves – but are their business models of sending products around the world sustainable?

«There is a lack of accurate data»

A giant fund company propagates climate protection – and at the same time co-finances deforestation, which is contradictory, to say the least and demands industry-specific climate and ESG risk assessment tools for harmful industries.

But even when looking at the entire value chain from energy generation to the end of a product lifecycle, there is a lack of accurate data. That said, I believe transparent, detailed reporting to the best of our knowledge is the right and most important approach.

External, independent ratings can be another solution. Analyzing comprehensive sustainability reports requires time and expertise. Ratings or seals ensure minimum standards. For the established FNG fund seal, for example, providers are required to have themselves audited once a year by the University of Hamburg as an independent auditor. The quality standard also creates transparency, which serves a key role.

«The northern countries are regarded as role models for a modern sustainable society»

When it comes to transparency, the Scandinavians are by far the most advanced. The Swedish government, for example, began implementing and continuously publishing its sustainability strategy as early as 2001, one of the results of which is that the country now leads the rankings of the most environmentally friendly countries – closely followed by Norway and Denmark.

Whether in climate protection, the education system or equal rights – the northern countries are regarded as role models for a modern sustainable society.

«Exclusions are only relevant as a flanking measure»

The financial sector is also considered exemplary. Some Scandinavian companies were co-founders of the UN Principles for Responsible Investment in 2006. The UN PRI are considered a guide for the financial industry. After a two-year boom, there are now 4,308 signatories.

The Nordics have long focused on demonstrating the impact of investments, their social or environmental impacts. Exclusions are only relevant as a flanking measure.

«ESG and carbon data should be integrated into the portfolio management system»

For years, the Scandinavians have been actively engaged in dialog with companies and voting at their annual general meetings, a field that is still quite uncharted. Such engagement provides portfolio managers with a greater information base for company analysis and investment decisions. Understanding how companies deal with material ESG risks and opportunities can have a decisive impact on stock selection.

ESG and carbon data should be integrated into the portfolio management system. At progressive institutions, they are not only available to all investment professionals, but they use them systematically. Failing to do so entails financial risks and weakens credibility. Greenwashing damages the reputable sustainable finance segment.

«One thing is clear: the sustainability process is complex and time-consuming»

Comprehensive monitoring of environment-related risks and opportunities should be implemented as soon as possible. For the sake of product truth and transparency, this data should be made available to investors in sufficient detail. Once again, it is important to say what is true. This will enable investors to decide for themselves whether the investment philosophy in question meets their own requirements.

One thing is clear: the sustainability process is complex and time-consuming. Product providers can hardly be expected to have accomplished their goals by now. The financial industry should not try to communicate such an image. Credible efforts and actions are the way to prevent even the last bit of trust in the financial world from being squandered.

Mike Judith is the international head of sales at Norwegian asset manager DNB Asset Management.

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