Investor focused think tank Universal Owner has published analysis warning that ambiguous net zero goals are undermining sustainability claims in the finance sector. Further analysis of poor practice for sustainability-linked bonds is also a cause for concern.
- There is lack of transparency and direction on sustainability targets in the financial industry.
- Greenwashing risks derailing progress and undermining trust in the market.
- New monitoring initiatives are paving the way for stricter controls and a clear methodology.
The lack of precise decarbonisation guidelines means initiatives can sound well-meaning without resulting in tangible improvement. The warning is that targets are inadequate and only commit assets managers to a small proportion of the emissions reductions required to reach net zero.
Vague aspirations do the market no favours
A report by think tank Universal Owner says that the targets set by 43 members of the Net Zero Asset Manager’s Initiative (NZAMI), published in May 2022, lack clear underlying milestones for achieving their goals.
NZAMI has 273 signatories to date, collectively holding $61.3 trillion in assets under management. That means that, so far, only 39% of signatories have even announced plans to align their portfolios with net zero by 2050.
The near term goal of those who have announced plans is a 15-26% cut in emissions by 2030. Universal Owner reports this is “barely half” of what is needed to reach net zero goals. The IPCC recommends emission reductions of 40% by 2030 to stay on track for net zero two decades later.
The initiative’s methodology is also described as “neither standardised nor rigorous”, according to the report, meaning that “targets are affected by ambiguity and confusion”, as illustrated by the pledges of the ‘Big 3’ asset managers – Blackrock (NYSE:BLK), Vanguard and State Street (NYSE:STT) .
BlackRock did not set a binding goal but expressed what it “anticipates”, while Vanguard estimated that only 2% of its assets will be invested in companies on “a net zero glidepath” by 2030, without specifying what that entails.
As for State Street, Universal Owner said that its target is “so ambiguous that it is virtually impossible to establish what it has committed to” and it did not respond to its request for clarification.
Sustainability-linked bonds grow in popularity but not in ambition
In a similar vein, asset managers and sustainability-linked bond (SLBs) holders are under increased scrutiny in the race for decarbonisation. There is growing market appetite for SLBs, which are issued as obligation bonds – meaning the issuer has to meet certain sustainability targets or it will have to pay a higher coupon to the investor.
The issuance of SLBs rocketed ten-fold to $110 billion in 2021, according to research from law firm Linklaters, with Europe emerging as the largest market globally.
They are not the same as green bonds, the proceeds of which are used specifically to fund environmental projects, such as installing renewable energy equipment.
SLBs issuers can set their own standards linked to the bond, which can be as ambitious or as modest as they want.
A recent analysis by Bloomberg found that over 100 SLBs issued by corporates to European investors, valued at almost €70 billion, were linked to targets that were “weak, irrelevant, or even already achieved”.
For example, Chanel issued €600 million worth of SLBs two years ago. The bonds were linked to a target that required the fashion giant to cut its Scope 3 emissions by a tenth by 2030 – except they had already fallen by 21% when the bond was issued, meaning the goal had already been achieved.
Tightening the grip on greenwash
Such issues, most kindly described as confusion about defining goals and target setting, is driving increased demand for transparency. It is also increasing calls for solutions and clarity around what exactly constitutes greenwashing.
One example of this is US risk and compliance specialist K2 Integrity’s new ESG fund certification solution, which analyses the compliance of managers and funds. Swiss ESG data company RepRisk recently announced it is to supply K2 Integrity with its environmental, social and governance risk data.
Alexandra Mihailescu Cichon, executive vice president at RepRisk, said: “When we look at our data, one of every five climate-related ESG incidents over the past two years was also linked to misleading communication (greenwashing). This presents a challenge for investors when it comes to separating empty promises from meaningful action, and a challenge for funds in proving their credentials.”
Governments target greenwash to protect consumers
Greenwash is not just the concern of asset managers and investors. Governments are also taking action. In the UK, the Competition and Markets Authority (CMA) is targeting fashion sustainability claims.
Meanwhile in Australia, the Australian Competition and Consumer Commission (ACCC) is examining sustainability marketing claims and online business reviews of over 200 companies.
The Commission plans to review company behaviour on sustainability claims across industries including energy, vehicles, household products and appliances, food and drink packaging, cosmetics, clothing and footwear.
It will separately seek fake or misleading online reviews and testimonials as it focuses on deceptive practices in the digital marketplace.
Deputy chair Delia Rickard said: “As consumers become increasingly interested in purchasing sustainable products, there are growing concerns that some businesses are falsely promoting their environmental or green credentials. Misleading claims about products or services undermine consumer trust and confidence in the market.”
She added: “The sweeps will be followed up with compliance, education and potential enforcement activities and we also want to improve awareness to enable consumers to make more informed purchasing decisions.”
Greenwash is once again becoming a mainstream concern
Greenwash is a concern because not only does is misrepresent what a company or financial institution is doing, but it undercuts overall faith in the market. Many of the language around net zero, sustainability, low carbon, carbon neutral (among many others) is confusing and vague and definitions can differ from one place to another.
Overall there is a need for better education about what constitutes greenwash and how companies can avoid it. There is rarely an outright plan to deceive but the problem highlights once again the importance of communication between different parts of a business – if sales and marketing is positioning a product a certain way, there must be facts and a reality underpinning that approach.