Investors: Time’s up for greenwashers

Climate lagards in high-emitting industries are about to get their comeuppance.

The financial community has bowed to public scrutiny and will no longer continue to fund heavy polluters who pay only lip service to corporate sustainability goals.

This week Bank of America joined nearly 70 other banks and investors in the Partnership for Carbon Accounting Financials, a framework for assessing emissions from activities financed by participants as well as their direct emissions. The Global Carbon Accounting Standard, together with parallel initiatives such as the Carbon Disclosure Project (CDP), Science Based Target initiative (SBTi) and the Task Force on Climate-related Financial Disclosures (TCFD), should put an end to the duplicitous practice of companies claiming to be green themselves while financing those that persist with unsustainably damaging business practices.

This trend has been gathering pace since the Paris Agreement set a legally binding global climate change agreement five years ago, and other initiatives such as the Principles for Responsible Banking backed by 180 banks are already working towards the UN’s Sustainable Development Goals. The UN’s Principles of Responsible Investment, launched back in 2006, has more than 3,000 supporters with a combined $100 trillion of assets under management. But the COVID-19 pandemic has created greater urgency, as big stimulus packages are at stake.

BlackRock, the world’s largest asset manager with $6.5 trillion in its portfolio, caused a stir in January when its CEO recognised that environmental, social and governance (ESG) and climate risks are as important as traditional measures such as credit and liquidity risk and called for a fundamental shakeup in the financial sector towards sustainability. BlackRock just this month identified 244 companies including ExxonMobil, TransDigm Group and Fortum that are falling behind on climate issues and has voted against management recommendations or raised governance concerns at 53 of them. The asset manager will now reveal its voting record every three months rather than annually to give greater transparency.

Asset class of 2020

There is now a dizzying array of frameworks such as TCFD and the Climate Disclosure Standards Board and standards such as the Sustainability Accounting Standards Board and the EU Taxonomy that create a whole new set of acronyms to learn. But what’s more interesting is that new asset classes are emerging from the colour shift towards green.  

Banks are now offering sustainability loans, offering better margins if companies meet their targets. And the ‘S’ in ESG has become more important this year in response to the pandemic, with COVID social bonds being linked to investment in areas such as healthcare, education and housing, considering the effective use of natural resources and a circular economy taking waste into account.

But don’t be fooled, this new acceptance of ESG metrics is not driven by an altruistic change of heart in the investment community. Money still talks. Investors have heeded reports from analysts such as Morningstar finding that sustainable funds perform better than their peers, perhaps partly because they have less exposure to fossil fuels. The S&P 500 ESG Index, a group of US equities scored on ESG metrics, is down 3% so far this year while the S&P itself is down 4%.

ESG implications will reverberate across all sectors of the economy, including the insurance industry which will now have to consider the UN’s new Principles for Sustainable Insurance. Policy, technology and investment markets have to align in order to meet this challenge. Emissions, pollution, unsustainable use of natural resources and disregard for social welfare can no longer be brushed under the carpet or simply outsourced to the developing world.