Storm clouds gather over Shell's Pulau Bukom oil refinery in Singapore. File photo: REUTERS/EDGAR SU
Storm clouds gather over Shell's Pulau Bukom oil refinery in Singapore. File photo: REUTERS/EDGAR SU

Environmental, social and governance (ESG) investing is booming. Driven by concern about the environment and social issues, as well as the promise of outsize returns, investors have ploughed much capital into ESG-focused funds and other investments. Morningstar reported in 2020 that there are more than $1-trillion (R14-trillion) in assets in global sustainable funds.

But amid that growth, some have raised concerns that companies are simply using ESG as a marketing tool without making any real effort to tackle these issues. 

While this may help companies attract investors in the short term, in the long term it could damage ESG as a concept, limiting its ability to make the world a better place while still delivering strong returns. To allay these concerns, universal standards and measurements should be instituted and companies should provide tangible proof that they are adhering to those standards. 

The most common practice companies are accused of adopting regarding faking their ESG credentials is greenwashing, which involves companies presenting themselves as being more environmentally friendly than they are. For instance, companies make claims that are not substantiated by easily accessible information. They also make vague claims purposefully meant to be easily misunderstood, or just intentionally falsified claims.

Though the recent rebranding of petrochemical giant Total as TotalEnergies (ostensibly to reflect its move beyond petroleum) may not yet be an example of greenwashing, observers will be watching closely to see if it smacks of this. 

Greenwashing is a huge concern for investors. Research from Quilter shows that greenwashing is top of the worry list for investors regarding responsible investing, with 44% concerned that ESG investments are not what they claim to be. According to the research, it is an even bigger worry than ESG investments having higher fees and costs and concerns that they might not perform as well as other investments. 

Fake credentials

But investors should be just as concerned about companies making misleading claims about their social and governance achievements. The former can lead to major unhappiness in the communities in which they operate, while the latter can bring down the company itself if left unchecked. 

There are increasing moves to standardise ESG measurement, making it more difficult for companies to fake their credentials. Recently, four leading ESG standards organisations, including the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), declared their intention to collaborate. The International Financial Reporting Standards (IFRS) Foundation has put forward a proposal to develop ESG standards. 

Governments are enacting increasingly stringent ESG regulations. The EU, for example, recently adopted the Sustainable Finance Disclosure Regulation, which requires firms to report on their sustainability strategy using set rules for how and what sustainability-related information they need to disclose. 

As similar measures are likely to be adopted globally, meeting ESG goals and standards is likely to become a business norm rather than something with which businesses can market themselves.    

Until then, investors who are interested in making genuinely sustainable investments should consider their options outside listed equities. Private equity not only plays an important role in diversifying investor portfolios, but the companies that play in the space are geared to the long term. That means they’re less susceptible to the vagaries of the stock market, something that has become increasingly important after 2020’s economic shocks. 

Private equity firms are geared not only to generate returns for investors but also to contribute to the overall wellbeing of the companies in which they invest. That is a good thing from an ESG perspective, as it means they won’t sacrifice long-term vision and values for short-term shareholder gains. 

This key concept is that funds with an ESG mandate don’t necessarily need to invest in companies that meet the criteria now, but rather in those with aspirations and actions to meet them in the future. 

While some companies use ESG as a marketing tool, it does not apply to the industry as a whole. There are very real, difference-making ESG-aligned companies providing returns to investors. As ESG measurement and regulation becomes simpler and more standardised, it will become more difficult for companies to use it in this way.

• Mabuto is a partner and ESG officer at Spear Capital.

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