Turbulent times
04 Sep 2024
Amid the current controversies and challenges facing ESG investing, Clelia Frondaroli explores what future lies in store for firms seeking greener investments.
Image: maglara/stock.adobe.com
ESG funds, green bonds, sustainable, responsible, and climate-friendly investing; there are a multitude of ways in which environmental, social and governance (ESG) funds can be defined and evaluated.
Yet, there currently remains no globally agreed upon framework to regulate sustainable funds. As such, ESG investing has become a topic of contention, where politicisation, anti-ESG regulations, and greenwashing claims have only fuelled the series of controversies that ESG investments have, of late, found themselves in. In June, the Financial Times revealed that investors worldwide withdrew approximately US$40 billion from ESG equity funds, of which US$4 billion alone were divested by US investors.
Steps have been taken to regulate the industry. The launch of the SIX Climate Equity flag in August this year has been designed to allow investors to identify firms and funds whose emissions reduction targets align with the 1.5C Paris Agreement. Bjørn Sibbern, global head of exchanges and executive board member at SIX, highlights that this will reduce investor “uncertainty around a company’s current and future climate emissions trajectory,” and hopes to garner legitimacy towards ESG investment firms.
Despite this, questions remain on the future legacy of ESG funds and whether investors are truly looking to continue investing a little greener.
A ripple makes a wave
Not all subscribe to the belief that ESG funds are destined for failure. Yann Bloch, head of product at NeoXam, characterises the current state of ESG investments as a moment of “temporary turbulence”.
Although he acknowledges that the wave of ESG divestment across the US has undoubtedly “sent ripples” of insecurity across the investment community, he is quick to dismiss any lasting impact. He explains: “Divestment actions often stem from short-term political or ideological shifts rather than from a genuine analysis of the risks and opportunities that ESG considerations can reveal.”
Instead, Bloch suggests a long-term perspective is crucial to navigating the turbulent nature of sustainable investments, where relying on comprehensive and accurate ESG data is key to identifying resilient funds.
However, a long-term perspective may be difficult to judge amidst the tumultuous year ESG funds have had. Concerns remain amongst investors that by buying into so-called ‘green’ investments, they have been ‘losing out’ on potential brown asset earnings, in part exemplified by the surge in fossil fuel stock prices at the beginning of the Ukraine war. As highlighted in a report by Morningstar, dwindling ESG fund launches globally (from 325 launches to 170 between 2023-24) have signalled investors and firms alike are questioning the profitability of such funds.
Casting shadows
Beyond profitability concerns, claims of greenwashing have further cast shadows of doubt on ESG investments. Increased understanding from investors surrounding environmental issues has accentuated the demand for businesses to prove sustainability claims within equity funds.
However, Bloch maintains a positive outlook in the wake of these concerns. He suggests that “rather than deterring investment in ESG funds, this heightened awareness is driving demand for better ESG data and more rigorous due diligence. Investors are becoming more discerning, seeking out funds that can demonstrate genuine ESG commitments.”
Yet, how are investors able to accurately verify funds that demonstrate these ‘genuine’ ESG commitments?
Bloch proposes: “The key to overcoming greenwashing lies in the quality and transparency of the ESG data being utilised.” This means data from reliable sources, along with advanced analytics and approved sustainability reviewers, are all factors that can help investors differentiate between businesses with legitimate environmental targets, and those otherwise. He concludes that “the push against greenwashing is, in fact, reinforcing the critical role of robust ESG data in ensuring the credibility of sustainable investments.”
Looking for clarity
The need for reliable and transparent ESG data is a sentiment that is echoed by Christa Clapp, global head of Sustainable Finance Market Analytics at S&P Global Ratings. She comments: “providing investors with transparency on the sustainability benefits of green financing, including bonds and equity is our core mission,” and proposes to deliver transparency via the use of equity assessment frameworks. These frameworks — tools such as SIX’s Climate Equity flag, in which S&P are external reviewers — act as an aid for investors to not only identify companies whose actions align with targets set out by the Paris agreement, but further provides clarity regarding the standards to which they are held.
Targeted legislation can also make a significant difference. In the UK, sustainability disclosure guidelines published by the government aim to make UK-endorsed International Sustainability Standards Board (ISSB) standards available from 2025. This means two things: firstly, all listed companies in the UK will have to adhere to the same set of standards, ensuring more clarity on ESG regulations. Secondly, the Financial Conduct Authority (FCA) will be able to use these standards to require UK-listed firms to accurately report their company’s sustainability-related information.
When questioned on whether the implementation of these standards would improve investor confidence, Bloch appears hopeful: “UK legislation to regulate ESG rating providers is a significant step forward in bolstering investor confidence in ESG funds.”
“By establishing clear standards and requiring greater accountability from ESG rating agencies, this legislation promises to bring much-needed clarity to the market,” he says, emphasising that inconsistencies in ESG ratings only invites investor scepticism.
He further highlights that the creation of a reliable regulatory framework allows for a better assessment of ESG risks and opportunities overall, acting as the “backbone” for investing sustainably.
Dominating the discourse
However, in the midst of the clamour and debate surrounding the environmental aspects of ESG funds, is it possible that social and governance factors have been cast aside?
NeoXam’s Bloch reaffirms that balance is everything. “Institutional investors are increasingly aware that strong social and governance practices are crucial for managing risks and ensuring sustainable growth,” he explains.
As such, social investing has seen a rise of over 18 per cent since 2021, suggesting that not all ESG funds have faced a downward spiral. Bloch continues: “Data that provides insights into labour practices, board diversity, community impact, and ethical governance is essential for evaluating companies on their social and governance performance.” Therefore, he suggests that unionising all three pillars of ESG is the essence of driving impactful investor strategies.
With the industry seeking transparency and clarity in ESG data, alongside a robust and standardised regulatory framework, it is clear that investors are calling for changes to be made to the ways in which ESG funds are currently run.
Despite this, better days may lie ahead for ESG investments. As Bloch summarises on a positive and constructive note: “Over the next five years, we anticipate a move towards greater standardisation and regulation, ESG data becoming more granular and real-time [and] a deeper integration of social and governance factors, fuelled by growing demand for more inclusive and equitable business practices.”
“The future of ESG funds will be shaped by the quality, accessibility, and strategic use of ESG data, driving greater accountability and positive change.”
Yet, there currently remains no globally agreed upon framework to regulate sustainable funds. As such, ESG investing has become a topic of contention, where politicisation, anti-ESG regulations, and greenwashing claims have only fuelled the series of controversies that ESG investments have, of late, found themselves in. In June, the Financial Times revealed that investors worldwide withdrew approximately US$40 billion from ESG equity funds, of which US$4 billion alone were divested by US investors.
Steps have been taken to regulate the industry. The launch of the SIX Climate Equity flag in August this year has been designed to allow investors to identify firms and funds whose emissions reduction targets align with the 1.5C Paris Agreement. Bjørn Sibbern, global head of exchanges and executive board member at SIX, highlights that this will reduce investor “uncertainty around a company’s current and future climate emissions trajectory,” and hopes to garner legitimacy towards ESG investment firms.
Despite this, questions remain on the future legacy of ESG funds and whether investors are truly looking to continue investing a little greener.
A ripple makes a wave
Not all subscribe to the belief that ESG funds are destined for failure. Yann Bloch, head of product at NeoXam, characterises the current state of ESG investments as a moment of “temporary turbulence”.
Although he acknowledges that the wave of ESG divestment across the US has undoubtedly “sent ripples” of insecurity across the investment community, he is quick to dismiss any lasting impact. He explains: “Divestment actions often stem from short-term political or ideological shifts rather than from a genuine analysis of the risks and opportunities that ESG considerations can reveal.”
Instead, Bloch suggests a long-term perspective is crucial to navigating the turbulent nature of sustainable investments, where relying on comprehensive and accurate ESG data is key to identifying resilient funds.
However, a long-term perspective may be difficult to judge amidst the tumultuous year ESG funds have had. Concerns remain amongst investors that by buying into so-called ‘green’ investments, they have been ‘losing out’ on potential brown asset earnings, in part exemplified by the surge in fossil fuel stock prices at the beginning of the Ukraine war. As highlighted in a report by Morningstar, dwindling ESG fund launches globally (from 325 launches to 170 between 2023-24) have signalled investors and firms alike are questioning the profitability of such funds.
Casting shadows
Beyond profitability concerns, claims of greenwashing have further cast shadows of doubt on ESG investments. Increased understanding from investors surrounding environmental issues has accentuated the demand for businesses to prove sustainability claims within equity funds.
However, Bloch maintains a positive outlook in the wake of these concerns. He suggests that “rather than deterring investment in ESG funds, this heightened awareness is driving demand for better ESG data and more rigorous due diligence. Investors are becoming more discerning, seeking out funds that can demonstrate genuine ESG commitments.”
Yet, how are investors able to accurately verify funds that demonstrate these ‘genuine’ ESG commitments?
Bloch proposes: “The key to overcoming greenwashing lies in the quality and transparency of the ESG data being utilised.” This means data from reliable sources, along with advanced analytics and approved sustainability reviewers, are all factors that can help investors differentiate between businesses with legitimate environmental targets, and those otherwise. He concludes that “the push against greenwashing is, in fact, reinforcing the critical role of robust ESG data in ensuring the credibility of sustainable investments.”
Looking for clarity
The need for reliable and transparent ESG data is a sentiment that is echoed by Christa Clapp, global head of Sustainable Finance Market Analytics at S&P Global Ratings. She comments: “providing investors with transparency on the sustainability benefits of green financing, including bonds and equity is our core mission,” and proposes to deliver transparency via the use of equity assessment frameworks. These frameworks — tools such as SIX’s Climate Equity flag, in which S&P are external reviewers — act as an aid for investors to not only identify companies whose actions align with targets set out by the Paris agreement, but further provides clarity regarding the standards to which they are held.
Targeted legislation can also make a significant difference. In the UK, sustainability disclosure guidelines published by the government aim to make UK-endorsed International Sustainability Standards Board (ISSB) standards available from 2025. This means two things: firstly, all listed companies in the UK will have to adhere to the same set of standards, ensuring more clarity on ESG regulations. Secondly, the Financial Conduct Authority (FCA) will be able to use these standards to require UK-listed firms to accurately report their company’s sustainability-related information.
When questioned on whether the implementation of these standards would improve investor confidence, Bloch appears hopeful: “UK legislation to regulate ESG rating providers is a significant step forward in bolstering investor confidence in ESG funds.”
“By establishing clear standards and requiring greater accountability from ESG rating agencies, this legislation promises to bring much-needed clarity to the market,” he says, emphasising that inconsistencies in ESG ratings only invites investor scepticism.
He further highlights that the creation of a reliable regulatory framework allows for a better assessment of ESG risks and opportunities overall, acting as the “backbone” for investing sustainably.
Dominating the discourse
However, in the midst of the clamour and debate surrounding the environmental aspects of ESG funds, is it possible that social and governance factors have been cast aside?
NeoXam’s Bloch reaffirms that balance is everything. “Institutional investors are increasingly aware that strong social and governance practices are crucial for managing risks and ensuring sustainable growth,” he explains.
As such, social investing has seen a rise of over 18 per cent since 2021, suggesting that not all ESG funds have faced a downward spiral. Bloch continues: “Data that provides insights into labour practices, board diversity, community impact, and ethical governance is essential for evaluating companies on their social and governance performance.” Therefore, he suggests that unionising all three pillars of ESG is the essence of driving impactful investor strategies.
With the industry seeking transparency and clarity in ESG data, alongside a robust and standardised regulatory framework, it is clear that investors are calling for changes to be made to the ways in which ESG funds are currently run.
Despite this, better days may lie ahead for ESG investments. As Bloch summarises on a positive and constructive note: “Over the next five years, we anticipate a move towards greater standardisation and regulation, ESG data becoming more granular and real-time [and] a deeper integration of social and governance factors, fuelled by growing demand for more inclusive and equitable business practices.”
“The future of ESG funds will be shaped by the quality, accessibility, and strategic use of ESG data, driving greater accountability and positive change.”
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