Why Global Investors Need Sustainable Investing Standards – Forbes

The motto of sustainable investing is that you can do well while doing good. It has been shown that the doing well part is questionable since sustainable investing does not generate superior returns. The question remains: does sustainable investing really do good?

Unfortunately, confusion over what defines sustainable investing makes it difficult to measure whether an investment actually has a sustainable impact. This causes retail and institutional investors alike to engage in their own research in an attempt to figure out just how sustainable their investments really are.

Sustainable investing continues to attract large amounts of capital as investors want to contribute to positive change, such as reversing climate change, promoting social justice, and advocating for better governance. According to Bloomberg, assets under management (AUM) that are invested globally in sustainability funds and portfolios could reach $53 trillion by 2025, accounting for more than one-third of projected total AUM of $140.5 trillion.

Currently, Europe accounts for about half of global sustainable assets. European demand for sustainable investing has prompted 253 European funds to change their investment strategy or portfolio in 2020. In addition, Europe saw 505 new sustainable fund launches in 2020 alone.

More growth is being projected in Asia, especially Japan, where McKinsey has linked sustainability to a 400-year-old cultural ethos of shuchu kiyaku, to think of societal benefits, not just profits.

As noted in my previous article, the U.S. is also seeing strong growth in sustainable investing, which accounted for more than 25 percent of all money invested in U.S. stock and bond mutual funds in 2020.

The Greenwashing Effect

Given such strong investor demand for sustainable investing worldwide, the stakes are high to counter the ongoing concerns over greenwashing, in which companies overstate and exaggerate their positive impact on sustainability. It’s more than a problem of perception. One group of researchers define greenwashing “as a combination of misbehavior and misleading communication”—including intentionally fabricating false information.

It has become increasingly difficult for investors to see through greenwashing when companies present themselves as more sustainable or environmentally friendly than they really are. In one recent survey by Quilter Investors, greenwashing topped the list of concerns among 44 percent of investors surveyed. In another survey,  six out of ten investors find greenwashing to be a challenge for sustainable investing, especially as sustainable investing goes increasingly mainstream for investors and fund managers.

European Sustainable Investing Standards

Europe is well ahead of the U.S. in setting sustainable investing standards with the initial implementation of their Sustainable Finance Disclosure Regulation (SFDR). The SFDR went into effect in March 2021 and sets the rules for sustainability-related information that the financial industry within the EU must disclose.

The objective is to prevent investment firms from greenwashing sustainability claims to make their investment funds seem more attractive. There are two aspects to sustainable investing, called double materiality, that the SFDR tries to uniformly measure. The first issue is whether a company or an investment actually has a sustainable impact on the environment or society.  The second is whether a company’s sustainable impact materially influences its investment performance? Also under the SFDR, investment managers will need to begin providing details into how they account for environment, social and governance (ESG) and other factors as part of their selection process for individual investments in their portfolios. As a result, it’s hoped that investors will gain more clarity.

The SFDR has received some criticism for potentially adding to the confusion of how funds are classified; however, proponents have hailed it as providing much-needed transparency. In a recent Wall Street Journal article, Wolfgang Kuhn, director of financial sector strategies at ShareAction, a nonprofit that promotes sustainable investing, said, “We want fund managers to nail their colors to the mast and say: ‘This is sustainability for us.’ Then as the client you can hopefully better decide whether that works for you or not.”

How Sustainable Is It?

As sustainable investing explodes in popularity worldwide, developing and adopting standards is a global imperative. The industry needs a comprehensive framework to provide a true apples-to-apples comparison that will allow investors to weigh one investment against another. Otherwise, investors will be left to wonder and guess just how sustainable any investment really is. SFDR is an opportunity to provide better measurement for how well companies and funds perform along sustainable investing criteria and needs to be expanded into the U.S. and beyond.

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