How To Tell Your Impact From Your Sustainable Investing — And Avoid Greenwashing
A greater and greater number of investors in the real estate world are factoring environmental, social and governance into their investment decisions. But something as seemingly simple as the labels put on funds and assets can be a big barrier to those looking to improve the credentials of their investment strategy.
“Without doubt, the jargon is myriad and confusing,” Hillbreak founder Jon Lovell said. “Everyday words are now being used by ESG specialists to mean very specific things, which might not be immediately obvious to others.”
Institutions looking to put money into funds or investment strategies need to know exactly what they will achieve with their investments. And investment or asset managers need to make sure they stick to increasingly stringent regulations when labelling their vehicles or assets.
Then there is the need for all involved to avoid “greenwashing” or “impact washing” — using words like sustainable or impact investment incorrectly, accidentally or deliberately — to claim that an investment is better for the world than it really is.
“Because of the range of products in the market and because of the increased attention being put on the ESG agenda, greenwashing has become a bigger topic of debate,” Lovell said. “Typically it has involved actors making green claims or putting the sustainable label on funds, on assets when the claim is superficial rather than transparent or evidence-based.”
Here are the key definitions in the sustainable and impact investing world that investors and managers need to understand, according to Hillbreak.
The European Union has been setting about formalising the way we use terms related to sustainability with respect to financial disclosures and investment. For the EU, sustainable investment must contribute to environmental objectives in a measurable way or contribute to social objectives, must do no significant harm to any social or environmental objectives, and must follow good governance practices.
This is significant, as it ties all three ESG pillars into the concept of sustainability. It also borrows the concept of “non nocere,” meaning do no harm, from the Hippocratic oath familiar to medics around the world.
Under new EU rules, a product cannot be marketed as environmentally or socially sustainable based on just one or two factors. It must effectively be neutral or positive on all other environmental and social factors, and “good” from a governance perspective, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.
The UN Principles for Responsible Investment outline how ESG factors should be part of investment decisions and active ownership. Driven by investors, this defines how the issues should be treated by investors and intermediaries, in terms of both investment process and related corporate behaviours. Things it takes in include incorporating ESG issues into investment analysis and decision-making processes, seeking appropriate disclosure on ESG issues from the recipients of capital and reporting on activities and progress toward implementing the principles.
At the heart of the UN PRI is the pursuit and delivery of competitive, risk-adjusted returns, recognising that material ESG factors that are not considered and managed effectively will likely result in weaker financial performance.
According to the Global Impact Investing Network, impact investments are made with the intention of generating positive, measurable social and environmental impact alongside a financial return.
The International Finance Corporation has augmented this by developing a set of impact investing principles backed by 60 public and private investors to define how this should be done in practice. This adds specificity about the requirement for measurement, management, verification and reporting of impact. This is about more than just passively taking assets that are “good enough” or about making minor improvements. It denotes a more active, intentional and additive approach to investing risk capital to mitigate environmental and social risk and deliver positive outcomes.
The Impact Management Project, which includes the GIIN, IFC and PRI, has gone further to clarify that impact management should be “the ongoing practice of measuring and improving our impacts, so that we can reduce the negative and increase the positive.” Investors should therefore expect to see measurement of the good and the bad, and judge the performance of their investments (and their intermediaries) on this basis.
Related to “impact” investing is the term “transition,” typically used in the debt markets as labelling for “transition finance.” This has come into use as a description for investments seeking to enable improvements in the climate and energy performance of assets and businesses. The climate transition is usually referenced to specific targets to reduce greenhouse gas emissions and limit the expected global temperature increase to 1.5 or 2 degrees celsius. The targets to which these investments align are not necessarily consistent. It is commonly understood to mean a transition away from fossil fuels, or to cleaning them up, such as through carbon capture and storage, and toward renewable and sustainable energy sources. In the space of transition finance there is, therefore, no standard benchmark or level to which the investments must perform from an ESG perspective. They must simply seek to make a contribution.