Greenwashing is a term that has been around for a long time. But, as a new generation of investors, consumers and finance customers come of age, the pressure on businesses and fund managers to build sustainability into everything they do is greater than ever.
To see why we only have to look at changing consumer sentiment, explains Joshua Brunert, global head of ESG Product, Apex Group.
Recent polling suggests, for example, that while 25% of ‘Gen Z’ investors are investing for financial security or to maximise wealth (19%), a much greater proportion (45%) are investing to build a ‘better tomorrow’. Likewise, the demand for ESG-aligned funds is increasing by the year, with $35 trillion of assets under management (AUM) now in ESG-labelled funds.
The trend is clear, and so the need to stop greenwashing and deliver the guarantees on sustainability that are so important to today’s investors is crucial.
To enshrine such guarantees across the financial sector, next year sees the EU Taxonomy Regulation for sustainable activities come into force. This framework will assess businesses and funds against a number of criteria focused on key issues of sustainability, such as mitigating and adapting to climate change, encouraging a circular economy, preventing pollution and promoting biodiversity. In short, the regulation requires businesses and funds in scope to disclose the exact percentage of turnover, capex or opex that aligns with activities classed as sustainable and that are proven to have completed requisite assessments to ensure they do not cause significant harm to the environment or society.
“The trend is clear, and so the need to stop greenwashing and deliver the guarantees on sustainability that are so important to today’s investors is crucial.”
Therefore, this regulatory framework is designed to ensure businesses do not just talk the talk but walk the walk when it comes to building a sustainable future. In theory, greenwashing claims will no longer stand up to scrutiny because there will be a clear measure to differentiate companies that generate only a fraction of their turnover from sustainable activities versus those that focus their business model on providing the sustainable solutions of the future.
But the big question is will it work?
Like all regulations, the proof of the EU Taxonomy will be in the pudding. The rules are coming into force at a difficult time, in the middle of an energy crunch and with a significant recession potentially around the corner.
Faced with these pressures, businesses and consumers may find themselves more concerned with day-to-day cost efficiency than with broader principles around sustainability. And, with the regulation threatening to place a further administrative burden on businesses and funds, teething troubles should be expected. However, if fund managers begin recording relevant data now and work with products that can help compile this data in a way that works with the regulation, then it need not be too onerous.
There will also be those who claim these regulations will make businesses less competitive. With fierce competition unfolding between financial centres in the EU and the post-Brexit City of London, for example, could the new Conservative Prime Minister’s promised regulatory ‘bonfire’ give London institutions an edge over their rivals?
Maybe, but fund managers should also keep an eye on the bigger picture.
The first thing to remember is that the moves against greenwashing and toward more sustainable ways of investing aren’t being dreamt up by the European Commission. Rather they’re being driven by changing consumer sentiment. The second driver is the reality we all face that both resources and time to address urgent global challenges, like the climate crisis, are finite. We are all bearing witness in real time to what happens when scarcity hits the energy markets, and the results are disastrous for individuals and the economy. The economic case for switching to renewable, and infinite, sources of energy has never been stronger, whether looked at from the position of consumer costs, geopolitics or protecting the environment.
The new competition
So, the regulations are coming and will be embraced. Why?
First up, adhering to the regulation will give fund managers access to wider pools of finance. As more and more investors, as well as more and more of the wider economy, are forced by consumer demand and regulation to clean up their own supply chains, more and more finance will be driven toward compliant funds. Non-compliant funds will find themselves less competitive as their available resources begin to dry up.
So, while taking a lax approach toward the regulations may give a fund, or even a country, a superficial, short-term advantage, the longer-term trend is clear, and, as always, early adopters stand to gain more than latecomers.
“Non-compliant funds will find themselves less competitive as their available resources begin to dry up.”
Secondly, the regulations will open a whole new competition in the market to be the most compliant and hence most ESG-friendly fund. This is what consumers are looking for, whether institutional or retail, and the competition will be on to marry economic performance with environmental performance. Those funds that do this stand to win.
So, while the arrival of more regulation is bound to elicit a few grumbles, it also represents an opportunity for fund managers to find better ways to reach an ever more conscientious consumer market and to also invest something other than money in our shared future. With the right products and guidance, fund managers could turn the EU Taxonomy rules into a way to be even more competitive in a changing market.
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