Avoiding the greenwash in sustainable investing

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Avoiding the greenwash in sustainable investing

Ethical, SRI, ESG, best-in-class, stewardship, sustainability and impact. As its popularity has grown, the responsible investment landscape has become confusing and overcrowded with terminology that excludes rather than enables. There is also little clarity or agreement on what the various terminologies mean. We believe confusion and poorly regulated product labelling may potentially lead to mis-selling.

SRI (socially responsible investment), which emerged as an investment strategy in the early 2000s, is in part being superseded by risk-based models such as ESG (environment, social and governance) integration. However, there exists a degree of interchangeability between the two, which can be unhelpful to investors seeking to navigate the space.

Whereas SRI considers holistic approaches to company performance from a responsibility and values perspective, ESG is more risk-driven and focuses on financial materiality rather than on responsible business practices. ESG has become the de-facto common denominator for integrating environmental, social and governance risks, but, increasingly, we are seeing ‘sustainable investing' come to the fore.

Mis-selling fears
For investment managers, another addition to the ever-expanding lexicon of responsible investing terms represents a communication challenge in providing clarity to investors. Sustainability has become an increasingly dominant concept in the UK investment landscape, and the swift take-up of this form of investing has brought with it challenges around definitions and the potential for ‘greenwashing' and product mis-selling. Thus, as responsible investors, we think it is imperative providers support investors in understanding this complex area.

In this context, it is crucial to guide clients on what, in our view, constitutes ‘sustainable investing'. We have always believed in the thoroughness of our approach and making it clear to clients how our Responsible and Sustainable model works. Given these concerns, our latest Amity Insight firmly sets out how we define ‘sustainability' from the point of view of investing.

At a fundamental level, we view sustainability as a key ‘locomotive for change' in investment decision making. The definition arrived at is informed by compelling emerging models of ‘transition' and ‘circularity', focusing in the main on environmental risks and solutions, while keeping in mind the social aspects and imperatives.

Change engines
Thus, our process leads us to the twin concepts of ‘Transition Champions' and ‘Sustainable Solutions', where the former are mainstream companies leading a strategic transition in their business models, and the latter are providing dedicated goods and solutions to address key environmental and social imperatives.

As part of our process we integrate four themes: education, health & well-being, social infrastructure and sustainable solutions. Not all companies we invest in will support one of these four themes. Equally, not all companies will have embarked on a transition journey, although we do view circularity to be a business positive. Where they do support our four themes, companies are still required to pass our Ethics and ESG screens.

Sustainable investment is already attracting significant capital inflows, and we believe this will only continue. Ultimately we view sustainable investing as one of the key drivers in investment decision making, and one that is capturing the imagination of markets, investors and society alike. But investors should be aware of what they are buying, drill down into the portfolio constituents and challenge managers over their definitions and process.

Neville White, head of responsible and sustainable investing at EdenTree Investment Management