Companies are increasingly called for increased transparency on their approach to on environmental, social and governance issues (ESG).
A £30bn pension fund in the UK has announced it will sack investment managers not acting against climate change.
By 2022, Brunel Pension Partnership demands their holdings “take steps” to reduce their emissions and improve their climate management quality, or they risk to be removed from the portfolio.
It follows BlackRock Inc’s (NYSE:BLK) decision to screen its active investments against a series of sustainability measures announced earlier this month.
READ: BlackRock announces full ESG compliance, FTSE 100 constituents still have work to do
Among experts, a key question is whether companies will fall into greenwashing practices – meaning they mislead stakeholders on the real impact of their activities.
“The big issue is transparency and making sure that firms that ‘talk the talk’ on the environment can also ‘walk the walk’,” Moira O’Neill, head of personal finance at interactive investor, told Proactive in an email.
“This move by Brunel Pension Partnership demonstrates that firms that are not clear on their ESG policies may increasingly face the consequences,” she added.
The financial sector is shifting to a more sustainable approach, supported by a set of tightened regulations being implemented this year.
READ: No one wants to be the bad guy: the path to ESG compliance
According to Julia Dreblow, founder at SRI Services & Fund EcoMarket, there are many misconceptions about greenwashing.
Firstly, it can be accidental or deliberate, and secondly, it does not only belong to multinationals - their impact is not necessarily stronger although they work on a bigger scale.
“Some people think that greenwashing concerns only big companies and that is not right: just because you have big companies in the fund, it does not mean they greenwash,” she told Proactive on the phone.
In fact, smaller companies may incur in higher financial risk if they do not increase their ESG practices, according to Standard Life Aberdeen PLC (LON:SLA).
Abby Glennie, investment director and fund manager at Aberdeen Standard Investments, pointed out that sometimes the problem lies in those firms not allocating enough resources to deliver high-quality data.
Everyone needs to do their part
Another fallacy is believing that ‘green’ investing only relates to activities within the sustainability space, such as renewables.
“What we have got to do is to build a greener structure, address all companies in the supply chain and that means reducing emissions in all companies across the board,” Dreblow added.
It is exactly what Brunel is looking to do as it pushes its investees to comply with the Paris Agreement benchmark of keeping temperature rise well below 2°C.
Some of its challenges will be to emphasise long-term strategy, investment in the low-carbon economy and shifting to new investment risk models.
“The demand for ethical investments is becoming too big to ignore and now there is a business case for asset managers to offer and promote ethical propositions,” O’Neill concluded.