Despite growing concerns among investors about the so-called “greenwashing” of sustainable investments, there “seems to be little evidence that it has become widespread in reality,” according to S&P Global.
In a recent comment, the firm said a lack of transparency on instrument labeling, reporting, and data disclosure leaves many investors wondering whether the instruments will have any real social or environmental impact. S&P cited a Quilter Investors survey from May that found that greenwashing was the biggest concern among 44% of investors regarding environmental, social, and governance (ESG) investing. The survey said investors have become increasingly sensitive to the effects of companies that may be exaggerating their “green credentials” to capitalize on the growing demand for the products.
American environmentalist Jay Westerveld first came up with the term greenwashing in a 1986 essay in which he claimed a hotel was asking its guests to reuse towels to help protect the environment when it was really just looking to cut costs. However, S&P said that since then “concerns about greenwashing have become broader in scope with companies perceived to be making exaggerated or misleading environmental claims, sometimes without offering significant environmental benefits in return.”
S&P also said the large volume of ESG marketing and labeling, combined with nonuniform sustainability commitments and reporting, has made it increasingly difficult for investors to know which claims are reliable and which are “greenwashed.” The firm said ESG investing has become so mainstream that it estimates sustainable bond issuance, including green, social, sustainability, and sustainability-linked bonds (SLBs), could collectively exceed $1 trillion in 2021, a near five-fold increase since 2018.
“A lack of consistency in ESG terminology associated with various ESG investments has become a key concern that may drive investor confusion when it comes to identifying which companies or financial instruments conform to a given set of ESG standards,” said S&P.
The firm cited the Journal of Environmental Investing Report 2020, which found there are more than 20 different labels being used for sustainable debt instruments, which all align with different guidelines or frameworks.
“The wide scope of labels and even wider scope of what constitutes a ‘green’ or ‘social’ project makes navigating the sustainable debt space increasingly complex for investors and reduces comparability across instruments,” said S&P.
Despite the confusion, the firm said increased scrutiny by investors is the best weapon against potential greenwashing as they demand more transparency and credibility.
“It’s becoming clear that entities can no longer simply state their sustainability goals or long-term targets,” S&P said. “Ultimately, we believe that companies that can substantiate their environmental claims, and align financing with a business strategy rooted in long-term ESG goals, will be better fit to withstand potential reputational, financial, and regulatory sustainability-related risks that will evolve over time.”