THE DANGERS OF GREENWASHING
The Sustainable Development Goals (SDGs), unveiled by the United Nations in 2015, are increasingly seen as an important benchmark for responding to the sustainability and societal impact of investment portfolios.
The 17 ‘Global Goals’, which aim to transform our world by 2030, cover many areas – such as ending poverty, reducing inequalities, improving education and responding to climate change. While the SDGs are not legally binding, measuring impact and outcomes through the lens of the SDGs is, according to the UN supported Principles for Responsible Investment (PRI), ‘a fiduciary duty’ for investors. Whilst this is open to vigorous dispute, it is unequivocally true that investors are referencing the key SDGs in their offer to clients. In turn this has led many service providers to begin to offer tools designed to ‘map’ portfolio exposures to SDGs and their consequential impact.
We have previously warned that the industry is facing an increasing risk of ‘greenwashing’ – a term to describe when asset managers purport to be ‘green’ through marketing, rather than fully integrating Environment, Social and Governance risk into investment processes. This has become particularly acute in the last couple of years with the launch of a wave of new strategies marketed as ‘sustainable’ or ‘impact’ by houses not normally associated with this form of investment, and often framing their objectives within the SDGs.
With a three-decade track record of powerfully integrating responsible investment into our process, we at EdenTree are acutely aware of the complex requirements of investing through an often simplistic ESG lens. Our early analysis suggests that framing impact solely through the SDGs could fail adequately to promote any real change in the way investment portfolios are constructed and managed.
SDGS ARE DIFFUCLT TO TRANSALTE TO BUSINESS
The 17 SDGs incorporate many of the themes sustainable investors such as we have considered for years. However, the goals themselves are not principally designed for business or investors, but are largely centred around State actors and other governmental organisations or global agencies, although most have a business implication.
The limitations of the goals becomes apparent when utilised simply as a framework for measuring the impact of portfolios. The overlay tools hurried to market so far seek to apply simple metrics to complex business models in a bid to provide a comparative, quantitative impact ratings methodology. Our research suggests each tool measures impact based on the SDGs in a different way, with startlingly different outcomes. In choosing a ‘model’, investors are taking a ‘you pays your money and you takes your choice’ approach that is perhaps not best placed to create confidence and trust in the market.
BARRIERS TO QUANTITATIVE IMPACT MEASUREMENT
While an approach that ‘integrates’ or ‘maps’ the SDGs across portfolios seems straightforward, our deeper analysis shows several weaknesses embedded in these methods. Not least, the data available from companies on which many of the models rely. With no formal requirement to release complete data, in consistent format, across geographies, it is highly unlikely that any meaningful results can be obtained. Quantitative ratings providers will be forced to used flawed, estimated and assumed data. This becomes glaringly obvious when witnessing the vast difference in model outcomes which we have seen in having detailed conversations with at least five current market models.
The most successful implementation of SDG impact measurement has come from thematic investors, but one must caution using this part of the market as a proxy for more general Funds marketed as ‘sustainable’, ‘ethical’ or ‘responsible’ etc. It is clearly simpler for investors to measure singular impacts where a thematic fund is only concerned with investing in, for instance, clean energy, water or waste. Whilst this simple approach works for a small range of SDGs and sectors, it fails meaningfully to measure the impact of broader portfolios that are more generally focused. The reality of a tracker sustainability fund based on flawed data and methodologies marketed as impact plus, is surely close at hand.
Viewing impact through the lens of the SDGs also narrows the definition of impact – resulting in the exclusion of many businesses, or even entire sectors that are ‘responsible’ and have many sound societal positives to commend them. For example, a company such as ITV might be viewed at best as ‘SDG neutral’, but under our model, the company is rigorously assessed across our nine positive screens to create an holistic view of the company and its fitness for inclusion in our Amity range of screened Funds against a full range of environmental, social and governance indicators.
PROCESS MUST MOVE BEYOND SDGS
By solely focusing on the SDGs, with currently incomplete data, investors risk overlooking the subtleties of impact investing. For some providers, whole sectors – such as pharmaceuticals – have been classified as ‘impact stocks’ due to their direct correlation with a specific SDG (SDG 3 Good Health & Wellbeing). However, we note many examples of companies classified as impact stocks fail to take into account business behaviour, ethics and governance and the detrimental impact for investors and society.
We welcome the current vibrant interest in ESG, sustainability and impact; the notion of ‘impact’ is constantly evolving. However, investors must be alive to ‘greenwash’ and simplistic solutions drawn from limited data and grounded solely in the SDGs, that may not offer the nuance required to understand a portfolio’s full qualitative value and ‘impact’.