ESG investing and greenwashing
THERE has never been a greater week to go back and talk about ESG and greenwashing – or lies, as my mum used to call them.
ESG is actually quite a simple message. It’s a company stating to the world, their approach and actions to the three huge words of Environment, Social and Governance. It’s not green, it’s not sustainability, and it’s not Bcorp, it’s ESG.
Environment – how does a company interact responsibility with the environment? Do they treat it kindly and fairly?
Social – how do they treat their two important communities - internal communities of staff and customers and external communities of . . . the world.
Governance – how do they behave in their business activities in actions and values? Do they approach other companies in the right way, behave appropriately?
What difference does that make to you as an investor or customer? There are a number of sides to this. Firstly, a company’s ESG model will tell its staff and its customers what their ‘vibe’ is - how we do things here. It’s the energy they give, and how they treat people and the world.
In a world with lots of jobs and not enough staff, good employees can go anywhere. They will choose where they are happy, where their values are aligned to the company and its actions. By definition, those with the better models will attract and retain the very best staff as they are indeed ‘sticky’. The same applies to customers.
People believe what you believe, they buy ‘why’ you do stuff, not how, or what you do.
The last four members of staff we employed, all joined us because of our values and how we treat people.
Those companies with good ESG policies therefore will become more profitable. They will retain staff, cut costs of training and replacing staff, and also attract the best. The same applies to their customers. That is a core reason why investors will enjoy the stable returns from investing into companies with strong ESG policies and values.
The EU introduced the characterisation of investment funds as article 6,8 and 9, with the latter two being classed as light green and green. For companies to attract that money they must satisfy certain ESG/sustainability criteria otherwise they won’t be invested into by those large funds. Your pension funds/ISAs direct their money into such funds. The loss of this investment will hurt such organisations and their share price.
Consider then, that just 8.4 per cent of UK funds would today pass as article 8, 9. While the UK has its net zero targets, it somehow doesn’t seem to think it urgent to characterise funds as the EU has done some time ago and had tabled this for action in 2025. Such characterisation would mean immediate loss of funds to fossil fuel companies so it seems strange action wouldn’t be taken now.
Such organisations are still allowed to lobby government and even sit on parliamentary committees. Moreover, nearly 80 per cent of lobbying isn’t covered by regulation. It is hard to see how the UK can have a robust ESG policy when the above exists.
Therefore, investors have taken this into their own hands with their money, but of course will benefit as the 91.6 per cent of capital that may currently not qualify as article 8,9 moves toward ESG qualification. Consider also, the impact on those stocks that do not qualify as ESG as the wall of money above is disinvested from it.
There is also no place to hide as greenwashing is being hunted down. Greenwashing is when a fund states it has clear ESG policies but doesn’t actually apply them, instead it, well, pretends, so investors believe they are making a difference but are actually still fuelling and supporting bad practise.
Just as I was typing this, 50 police officers raided the offices of DWS and Deutsche Bank stating that ESG was not considered at all in a large number of investments, calling it prospectus fraud. Its 2021 report, published in 2022 showed 75 per cent less in ESG assets than the year before, an astonishing drop from €459bn to €115bn.
This is a clear message to all that greenwashing will not be tolerated and will have a dramatic tidy up effect on investment policies.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an investment query call Darren McKeever on 028 6863 2692, email email@example.com or visit wwfp.net