When global warming & climate change first became a worldwide area of concern, and new initiatives were created to “Go Green” and “Save the Planet”, one thing I’m sure very few people expected is the way large businesses and corporations would exploit the ‘Green’ industry for profit. This exploitation is known as greenwashing, where products or services are often deceptively disguised as ‘eco-friendly’, but do not truly meet ‘green’ standards, or are in fact environmentally harmful.
But what does this have to do with the financial industry?
One would probably assume that money is one thing that cannot be exploited by greenwashing - as I did before starting this blog.
However, the investing world does hold a green initiative in the form of ESGs, which measure the environmental, social and corporate governance of corporations in the interest of potential investors who wish to invest only in sustainable, or ‘green’, corporations.
These were introduced in the early 90’s, and have steadily grown in popularity as efforts to minimise the effects of climate change have become more prominent around the world. Most are aware, however, that these investments do not grow as proportionately as others, and the main objective of investing in these assets is to be environmentally-friendly, maybe to sleep better at night, but not necessarily expecting returns well above the average of a chosen index.
Some investment houses have taken on this initiative, but with very little regulations in place, few have actually had the eco-friendliness of their ESG policies governed over the years. However, recent regulators have found that not all ESGs are what they seem, and there are some that are rife with greenwashing.
Clients investing in an ESG expect that their money will, in some way, be helping to reduce the effects of climate change. However, some recent discoveries have found that there has been extreme mis-selling of these investments - investors are not given clarity and information is omitted from them.
Some of these investments have even funded corporations that contribute to the problems that the ESG claims to oppose, such as oil and pipeline companies, or coal industries. There have recently been two major banks that have been accused of greenwashing, namely HSBC (the largest European bank) and Deutsche Bank's DWS group, which you can read about by clicking on the respective names. We assume that as banks are not solely investment houses, and can rely on other business to fall back on, they do not face as much of a risk by greenwashing as other financial houses might - which is not to say that smaller financial service providers are not also guilty of greenwashing.
In fact, Stuart Kirk (who was the global head of responsible investing at HSBC) came under fire, and has since been suspended from his post for addressing the marketing strategies of the bank with regards to selling ESGs. Evidencing that over the years, risk assets have had a positive correlation with the proximity of ‘impending doom’ (increasing as the ‘doom’ approaches); Kirk claimed that investors need not worry about climate change right now as humans have and will adapt to change over the years, and that the devastating future effects of climate-change are over-exaggerated through these marketing strategies in order to sell ESGs. The presentation by Kirk implies that there is extreme manipulation of data within the system to predict devastating economic outcomes caused by global warming, therefore encouraging more people to invest in ESGs where it may not be necessary. This was a serious claim made by Kirk, and one that is now receiving a large amount of attention.
* Although we do not agree with every statement Kirk makes regarding global warming and climate-change, we find these claims and his take on ESG implementation as a responsible investment professional interesting.
In South Africa, we are lucky enough to have the Gordon Institute of Business Science (GIBS), who have launched the “Responsible Finance Initiative” (RFI) which focuses on the relevance and responsibility of financial service providers to the needs of its clients as South Africans, and our unique context in the world. We need to realise that we do not have the resources that first-world countries do, and have many more social and cultural issues too. As South Africans, we therefore need to prioritise the socio-economic sector before any other can be addressed - people will not care about helping the environment if their own basic needs are not being met. The RFI places the onus on financial institutions to investigate and ensure that they are in fact providing their clients with sustainable products. Their main goals are to develop ways of measuring and reporting the impact of assets in order to create suitable ESG portfolios, and to discover and fill any gaps that there might be in these markets.
So - where is all this going? Well, you can rest assured that with private FSPs you will most likely not run into this greenwashing issue. The MSCI index (a broad global equity outline) is used as a guideline by service providers, and indicates a standard that has to be met by them. They therefore can not manipulate or exaggerate data to their advantage, and since investments are their main income source, attempting to do so would be a risk that would not be worth taking.
Of course, we at Finpas believe in the importance of sustainability and support the advancement of green initiatives. We offer ESG options from our different service providers - however, with us you can be assured that we have done our due diligence, and that the products that we provide our clients with will in fact contribute to a more sustainable future for you and your loved ones.
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