No-one can fail to have noticed the escalating arms race in staking out corporate climate credentials. Perhaps Volkswagen’s dramatic intervention, announcing it wants to appoint a young climate campaigner who can ‘aggressively challenge’ the Group’s environmental policies, is just the latest and loudest of headlines designed to cement climate acceptability and public approval.
Given the extreme uptick in excitement, how is the lay observer - or investor – to see through the green haze and determine who can be trusted? This goes to the heart of the rising tide of what has been called ‘greenwash’ – disinformation put out by an organization so as to present an environmentally favourable image. In a well-known poem, Emily Dickinson says ‘tell all the truth, but tell it slant,’ as though she prophetically foresaw the age of fake news and misinformation. Does this matter if the end effect is to generate debate? A recent opinion piece thoughtfully suggested that greenwashing could be a ‘necessary evil’ as the first step in ‘altering the normative landscape’ rather than a cynical means of deliberately deceiving or embellishing.
There may be some truth in this, but equally the sheer speed at which investors and corporations have rushed to embrace environmental sustainability can only be viewed as phenomenal – and like the best of illusions, it needs a little probing.
There are two sides to this coin: the alleged ‘greenwash’ by business to give a sense of direction, effort and urgency to their climate strategies, and the fund management industry in escalating product launches around ‘transition’, ‘sustainability’, and ‘impact’.
From a corporate perspective, fossil fuel companies have been in the eye of the storm. Those involved in the exploration or production of oil, gas, and coal, without a sensible transition story have been at the forefront of public and investor activism – from Extinction Rebellion to Climate Action 100. Public activism is necessarily centred on the scarier aspects of irreversible climate change; investors, whilst not unaware of social and environmental hazard, are equally focused on the reality of stranded assets and dwindling returns from ‘pariah’ industries.
The oil supermajors are having the hardest time. For over a century they have been the rain-makers, powering the world with black gold. They face the very real prospect for the first time in 100 years of going out of business unless they can successfully transition away from oil and gas – not immediately, but at least with a cogent plan. BP and Royal Dutch Shell, arguably among the more advanced in thinking, have set what they believe are ambitious emissions reduction targets. But for the lay investor – do these stack up as meaningful change? How should we then challenge the statements made by our leading companies, and can their ambitions be adequately tested, not least if targets selected allow companies to continue to increase oil & gas extraction in absolute terms, yet still hit a “net carbon footprint” target?
Fossil fuel companies represent the ‘thin red line’ for activists. Their business models are under attack, and they are accused of doing too little in the face of a climate emergency. At EdenTree, our range of Amity Funds have long avoided mining and oil & gas on environmental and human rights grounds, such that these funds represent strong low-carbon proxies.
Practically the first announcement incoming BP Chief Executive, Bernard Looney, made was to change the discourse by setting ‘a new ambition to become a net zero company by 2050 or sooner’. Royal Dutch Shell – supplier of 3% of the world’s energy speaks ambitiously of utilising operational efficiency, shifts to natural gas, growing renewables, biofuels and carbon capture and storage to reach a net zero target. Glencore, the world’s largest coal trader (and outspoken critic of ‘wishy-washy’ statements on climate change) has refused to set an emissions target, instead capping coal production which will naturally see its less economic mines in ‘run-off’. Which is to be believed – a net zero aspiration over a thirty year period, or a hard cap on production, but no attempt to set limiting targets?
In truth, both are necessary – both because absolute action is needed, and because we cannot know what the inhabitable world will be like in 2050 – in these circumstances aspiration may at least be a start.
For the investor keen to avoid ‘greenwash’ a combination of actions is required. First, targets need to be set around technology and operational efficiency, with an honest conversation of how far this can take you. Second, meaningful allocation of capital over time to alternatives - BP’s capital allocation to new oil and gas projects continues to outstrip its allocation to alternative low-carbon technologies by a ratio of 32:1. Unless this changes, no-one will find its ‘net-zero’ ambition credible.
Fossil fuel companies represent the ‘thin red line’ for activists. Their business models are under attack, and they are accused of doing too little in the face of a climate emergency. At EdenTree, our range of Amity Funds have long avoided mining and oil & gas on environmental and human rights grounds, such that these funds represent strong low-carbon proxies. This brings us to the role of investors.
Institutional investors have been an enormous force for change in the headwind of climate change; they have led, collectively, important initiatives such as the IIGCC (Institutional Investors Group on Climate Change) Climate Action 100+ and the Transition Pathway Initiative (TPI). The financial sector has developed and progressed the ground-breaking TCFD –Taskforce on Climate-related Financial Disclosures. Again, is this ‘greenwash’ – are these endeavours forcing change, or a screen to hide behind continued allocation of capital to fossil fuel extraction? There is strong evidence that whilst the level of capital allocated to coal has fallen, there has been only limited diversion of capital away from oil, raising the heady charge of investor hypocrisy. For investors of integrity this dilemma has exposed a tension between the need for regular income, and a need to see active transition by the oil majors in order to justify continued investment.
However, at EdenTree we recognise this is a pan-industry issue requiring a pan-industry response; all companies in high impact sectors need to act. When we began foot-printing our equity funds four years ago, we frequently engaged companies that were reluctant to set targets or even publish their emissions; this is slowly changing.
Given the huge potential for ‘greenwash’ across industry, it is incumbent upon asset managers to interrogate and probe the robustness of climate targets and disclosures when engaging with companies. We believe we have a responsibility to clients to justify holdings on climate (and other ESG) grounds, and to ensure disclosures are reasonable and appropriate.
Unfortunately, this is far from being assured, primarily owing to weak regulation and the white-hot excitement around new ESG products. The fund management industry has, in our view, not been free of ‘greenwash’. As the market becomes ever hotter, new entrants have poured in with products and ‘solutions’ based funds focused on ‘sustainability’ and ‘impact’.
There is uneasiness, resulting in the Investment Association, the European Commission and now the British Standards Institute, all launching frameworks and standards to ensure clients will not be hit with a new mis-selling scandal should the likes of Exxon, Shell and Rio Tinto be found to be core constituents in so-called sustainability funds. Our own process rigorously interrogates a company’s credibility around offering sustainable solutions, or in being a meaningful transition or ‘circular economy’ story. We believe strongly that avoidance of ‘greenwash’ will increasingly hinge on quality of process, integrity of mission and competency of resource. Indeed, the latest warning has come from commentators suggesting a new phenomenon of ‘competency greenwash’, where a fund manager’s internal ESG resource, may be less expert and competent than they would have you believe.
Ultimately, the only way to judge if an asset manager is taking climate change seriously is to look at their process and in-house competencies; to look at the holdings in their portfolios; to look at how they vote; to look at how they engage with investee companies; to look at how they report.
In the hunt to eliminate ‘greenwash’ investors need to go beyond glossy reports, creatively worded policies, seemingly ambitious but vaguely worked out targets, and seek real transition and change.