Greenwashing poses challenge to sustainable investment

Environmental issues are the most important engagement issue for shareholders, but at the same time frustration is building at the failure of some firms to come forward with sufficiently ambitious and quantifiable climate strategies.

That is the key headline from a majorannual surveyundertaken by asset management giant Schroders, which assesses the views of institutional investors managing $25.9trn cross 26 countries.

However, as sustainable investing has become an increasingly mainstream investment consideration, the study found greenwashing has emerged as a significant challenge for investors. Some 60 percent of investors felt greenwashing — "a lack of clear, agreed sustainable investment definitions" — was the most significant obstacle to delivering on their sustainable investment goals.

In addition, almost half of investors — 48 percent — said a lack of transparency and reported data was restricting their ability to invest sustainably, up from 40 percent a year ago.

Indeed, 55 percent of respondents — up from 49 percent a year ago — said data and evidence that proves investing sustainably delivers better returns would encourage them to increase their green investment allocations.

Investors widely regard active engagement with companies as a crucial mechanism for driving climate and environmental action, according to the survey of 650 institutional investors, but asset owners' efforts to accelerate the adoption of credible decarbonisation strategies is hampered by greenwashing from corporate boardrooms that offer scant details on their sustainability plans.

Rather than divesting from companies that fail to take requisite action to tackle environmental impacts, the survey results pointed to a strong preference among asset managers for engagement policies that require transparent reporting and tangible outcomes from corporates backed by investors consistently deploying shareholder resolutions to vote in favour of more ambitious green strategies.

Almost 60 percent said active company engagement was key to driving sustainability, a significant leap from the 38 percent who highlighted the importance of engagement in Schroders' institutional investor survey last year.

The survey also found that 35 per cent of investors choose dedicated ‘green’ assets or are working to improve their ESG requirements because they believe this will boost returns and lower risk. Schroders believes this trend points to a decline in the false assumption that sustainability is bad for business. Its 2018 iteration of the survey saw half of the respondents raise concerns over the performance of ‘green’ funds.

Meanwhile, just 12 percent of investors said they did not hold any environmentally sustainable investments, down from 19 percent a year ago. And in further evidence of the growing appetite for so-called environmental, social and governance (ESG) assets, over two-thirds of respondents said they expect sustainable investing to grow in importance over the next five years.

Reasons cited for the growth in sustainable investing were a desire to align investments with corporate values, responding to regulatory and industry pressure, and a belief that such investments can drive higher returns and lower risk, according to Schroders.

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