With growing investor interest in environmental, social and governance (ESG) issues, it has been inevitable that some firms, funds and service providers have leapt to greenwash’ their credentials or those of their clients to make them seem more attractive as an ESG investment.
For investors it can be difficult to ascertain how true these claims are, whether there is kernel of truth or whether the boasts are an exaggeration, or totally unsubstantiated.
While professional investors can call on agencies that specialise in ESG rating, their various metrics and measures can vary substantially, and are not cheaply and readily available to the small private investor.
With sales of sustainable investment funds to UK retail investors tripled from 2019 to 2020, the HM Treasury is creating a ‘green taxonomy’ to make it easier for investors and consumers to understand how a firm is impacting the environment.
Better data, the thinking goes, will help companies, investors and consumers make more informed green choices, support investment in sustainable projects and boost efforts to tackle climate change, with the new green taxonomy aiming to “set the bar for investments that can be defined as environmentally sustainable”.
Following Chancellor Rishi Sunak’s unveiling of the plans for the taxonomy last November, the Treasury has today formed a taskforce of independent experts, the Green Technical Advisory Group (GTAG), to oversee the delivery of the taxonomy.
The Treasury said the green taxonomy will “help clamp down on greenwashing”, saying “better data will help companies, investors and consumers to make informed green choices, support investment in sustainable projects and boost efforts to tackle climate change”.
John Glen, economic secretary to the Treasury, said: “We want investors and businesses to play their part in greening our economy and transitioning to net zero, so it’s crucial we have a clear common definition of what green means.”
Chaired by the Green Finance Institute and made up of financial and business stakeholders, and experts on taxonomy, data and sustainability and green finance from academia and industry, the Green Technical Advisory Group (GTAG) will provide independent, non-binding advice to the Government on developing and implementing a green taxonomy in the UK context.
Moira O’Neill, head of personal finance at Interactive Investor, agreed that it was very difficult for ordinary retail investors to distinguish between ‘truly, madly, deeply green’ and ‘simply washed’ and it was a problem for the whole financial industry and in particular the fund management industry.
Although the Investment Association earlier this month called on the G7 to implement mandatory climate-related risk reporting for companies against a standardised set of principles, O’Neill said the investment management industry hasn’t always been on the front foot on this issue.
“In that sense, an independent taskforce is hugely welcome – and interestingly, there is not a fund management group in sight on the Green Technical Advisory Group,” said O’Neill.
However, she said there are some steps investors can take as part of their investment research to help sort the ‘green’ from the ‘greenwashed’.
“A fund management group’s heritage in responsible investing is worth looking at – it can give a good indication of whether sustainable investing is in the DNA, or if it is being used as a marketing tool,” said O’Neill.
“Some fund managers make heavy use of environmental, social and governance rating agencies when considering the ‘green’ credentials of an individual company. Transparency, here, is key, so it is important to gauge how a fund manager invests and arrives at a decision as to whether a company meets its ESG definition.”