Analysis

Sustainable Standpoint: Expect to see ‘green-bleaching’ allegations in 2023

In part two of this series, ESG industry experts reflect on regulation, greenwashing and transition plans

Sustainable Standpoint is a new ESG Clarity series focusing on reflections of developments in ESG investing over the past year, and predictions for potential milestones in 2023.

In part two of this series, Julia Vergauwen, Andy Howard and Nazmeera Moola share their thoughts on SFDR, greenwashing, science-based targets, human rights and transition plans.

Expect to see a rise in green-bleaching allegations

Julia Vergauwen, managing associate, Linklaters

Reflecting on what has been a tumultuous year for ESG and markets in general, what has been your biggest challenge and how have you overcome it?

The rapidly evolving ESG landscape has made it a challenging year for markets across the globe. For asset managers, it has been critical for them to think strategically. However, regulatory uncertainty and geopolitical movements have made it incredibly difficult for them to plan both strategically and long term. Navigating a fast-changing and unpredictable regulatory landscape, which varies across jurisdictions, has presented substantial challenges.

Asset managers have grappled with the EU’s disclosure framework since 2021. And only late in the day we have the application of more detailed rules (the Sustainable Finance Disclosure Regulation (SFDR)  Level 2 requirements from 1 January 2023), the European Supervisory Authorities published a Q&A on aspects that touch the core of the SFDR (looking to define what is a “sustainable investment”), while ESMA launched for consultation draft guidelines on the use on funds’ names with ESG or sustainability-related terms to prevent misleading investors and prevent potential greenwashing risk.

And this does not represent the end: it’s only the beginning. Further developments are coming in 2023 as the EU continues to refine its approach.

Please provide one prediction for the ESG investment world for 2023?

The driver for policymakers, and increasingly for supervisors, continues to be greenwashing – both in the EU, the UK and beyond. We can expect to see an increase in action taken against greenwashing and possibly even a rise in green-bleaching allegations as the market becomes more sophisticated and more ESG-related disclosures become available such as SFDR reporting.

The concept of greenwashing, which will likely increase in granularity, now also captures investor expectations not being met unintentionally, for example if an investment has been made into a fund that was set-up as Article 9 and is now being downgraded due to regulatory uncertainty. Managing greenwashing and green-bleaching risks is and should continue to be a top priority for asset managers in 2023.

Social issues – such as human rights and diversity – will see a bigger focus

Andy Howard, global head of sustainable investment, Schroders

Reflecting on what has been a tumultuous year for ESG and markets in general, what has been your biggest challenge and how have you overcome it?

At Schroders, we committed to transitioning towards net zero over the coming decades, including setting a Science-Based Target, validated by the Science-Based Targets initiative earlier in 2022.

But setting a target is the easy part. How we, and other businesses, decarbonise is critically important to the value we will create for our clients. We have created the Climate Transition Action Plan to outline a roadmap.

Political momentum clearly slowed in 2022, but importantly the private sector continues to push ahead, helping close some of the gap between the ambitions global leaders have laid out and corporate readiness for transition.

The COP27 climate summit in Egypt in November did little to cement global commitments to action. That said, agreement on a “loss and damage” fund to help developing nations should ease one key challenge to delivering the changes needed to reach the goals laid out in Paris in 2015. Attention will turn to COP28 in the UAE later in 2023.

Our focus has been on using our voice and influence to engage the most exposed companies and pushing them to lay out transition plans. In the year ahead we will be intensifying those efforts.

Please provide one prediction for the ESG investment world for 2023.

At a human level, a cost-of-living crisis has taken grip in many countries and while the most acute pressures may abate in 2023, poverty is a threat we will be monitoring. Few governments have the fiscal capacity to absorb shortfalls in household budgets and social stresses could intensify. Companies are coming under pressure to ensure vulnerable workers are protected – whether through wage increases and benefits for their own employees or their responsibility to workers in supply chains.

We could see greater pressure on the political systems. This could undermine investors’ faith that political leadership will clearly define priorities, pushing responsibility back to companies and investors like ourselves.

While climate change and nature have dominated headlines, particularly in the run-up to COP27 and COP15, we expect a bigger focus on social issues, including human capital management, human rights and diversity and inclusion in the new year. These are core themes for active ownership for us at Schroders.

Our own survey of more than 700 institutional investors in 2022 found around half (48%) are focusing on the impact of their investments, up from about a third (34%) in 2020. We expect that trend to continue.

Growing calls for companies to publish transition reports

Nazmeera Moola, chief sustainability officer, Ninety One

Reflecting on what has been a tumultuous year for ESG and markets in general, what has been your biggest challenge and how have you overcome it?

We have been concerned for some time about the unintended side effects of short-term portfolio decarbonisation targets. It is not that difficult to decarbonise a portfolio. You sell high emitting sectors and high emitting countries, principally emerging markets.  This has little impact on physical emissions – but it does make it much more difficult for emerging markets to transition and leaves high emitting companies in the hands of investors who are unconcerned with transition. In contrast, setting net-zero targets that require intensive engagement with high emitting companies is harder – and results in a good deal more work.

However, this has the highest probability of resulting in a reduction in real-world emissions. We have spent a lot of this year explaining our targets and our approach to asset owners and other financial institutions. Fortunately, there does seem to be a growing understanding of the need to finance the transition in emerging markets and to limit divestment and exclusion.

Please provide one prediction for the ESG investment world for 2023. 

The focus on evaluating and funding transition will intensify. There are growing calls for companies to publish transition plans as part of their annual reports. The UK has set up a Transition Plan Taskforce to specify best practice for transition plans. The data and tools available to evaluate transition plans will improve.  However, it will still be several years before we reach a widely usable standard. In the meantime, in-house expertise will be needed to assess transition plans.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...