The ESG space is nothing if not in major growth mode, which is on display in just about every direction across the financial services landscape.
Funds fitting Morningstar’s definition of environmental, social and governance investing took in $51.1 billion in net asset flows last year, marking not only a fifth consecutive annual record but a figure more than double the $21 billion worth of 2019 net flows.
This kind of growth and attention is understandably music to the ears of long-time proponents and purists in the world of ESG investing principles.
It is a validation of sorts that doing good, or at least doing less harm to the world, also makes financial and economic sense. Many of those early arguments that sustainable and impact investing themes present a drag on investment performance are gone or are at least quieter these days.
But flowery backdrops notwithstanding, there remain many and growing challenges facing the ever-expanding ESG space. Part of the challenge is that the space is ever-expanding from a foundation that, like a lot of good intentions, was never properly defined or organized, which is perfectly understandable.
But even now, as smooth ESG prose rolls trippingly off just about every tongue in finance, the sprawling industry of asset managers, rating agencies, investors, financial advisers, and all manner of proponents, are nowhere near settling on a common vernacular for impact, sustainable, green, ESG, or whatnot.
In essence, it’s confusing, and at some point, we will no longer be able to write it off as growing pains.
Hardcore enthusiasts, often the loudest spokespeople in the space, will often invite you deep into the weeds to dissect the nuances of what it all means. And if you have the time, energy, and brainpower it might all start to make some kind of sense.
But most ordinary people aren’t interested in, or even ready for, the varied distinctions of how a municipal bond issuance can be qualified as ESG, they just want to know if it is or isn’t and what that means from an investing perspective.
This is where I climb atop my soapbox and call out those folks who are increasingly taking issue with the term “greenwashing.” For the uninitiated, greenwashing, a term officially added to the Oxford English Dictionary in 2010, refers to the practice of intentionally representing something as more ESG focused than it is.
In the investing world, such misrepresentation would seem like a bad thing, but for some reason there is pushback on the use of the term, as if to suggest it tarnishes even a weak green effort, therefore hurting the larger cause.
I disagree; it is an area in desperate need of more clarification.
As I’ve already laid out, there’s way too much nuance flittering across the ESG space. Even if this level of vague distinction is acceptable at a time when everyone is scrambling to catch Europe in the global ESG race, we shouldn’t be afraid to call someone or some company or municipality out when they stretch the limits of the ESG label.
The pushback I’ve gotten when it comes to the greenwashing term is often along the lines of what French philosopher Voltaire described back in the 1700s as not allowing the perfect to be the enemy of good.
I get that. In an uphill climb, which ESG investing certainly is, albeit with some healthy momentum, folks don’t want to draw attention to lesser or unsuccessful efforts.
SHADES OF GREEN
Admittedly, there are and probably always will be, shades of green.
But when I think of greenwashing, I’m not talking about BlackRock’s chief executive Larry Fink running around telling everyone to be greener while the $7.8 trillion asset management conglomerate he oversees owns at least $85 billion worth of coal investments.
I’m not even talking about former Vice President Al Gore, who won an Academy Award for his global warming PowerPoint presentation, “An Inconvenient Truth,” being found out for living in an estate that consumes 21 times more energy than the average U.S. house.
To me, those qualify more as embarrassments, hypocrisy, and bad PR.
Greenwashing, where the ESG purists should be eager to put their foot down, implies the kind of deception that could lead ESG-conscious investors to buy something that only claims to be green.
I’m referring to funds adding generic ESG-themed statements to prospectuses or even renaming funds to suggest a green theme without altering the investment strategy.
The shades of green really start to get fuzzy when it comes to fixed income, where investors and portfolio managers must make decisions about green bonds being issued by otherwise non-green companies, and vice versa.
Consider, for example, electric-car maker Tesla Inc., which is generally regarded as an ESG-friendly company, but only two of its three debt offerings qualified as green.
According to the Climate Bond Initiative, of the $140.5 billion worth of debt issuance it tracked through the first 11 months of 2020, just $31.5 billion was certified by CBI, while the remaining $109 billion is described as labeled green and aligned with CBI definitions.
CBI clearly recognizes there are shades of green, but also shows an additional $102.8 billion worth of debt issuance last year that was labeled green but was not aligned with CBI definitions.
In other words, greenwashed.