Climate investing experts are increasingly calling out institutionalised greenwashing in the financial markets that seriously undermines efforts to reduce carbon emissions. Only government action and major reforms will change this situation, they say.

Government action is needed to bring about a radical shift of the underlying system of business and finance, said the conference panellists. “Changing the corporate charters and the role of boards is an explosive discussion, but it is the elephant in the room,” said Sasja Beslik, former managing director and head of sustainable finance at Bank J. Safra Sarasin, speaking on a conference call organised by the Global Returns Project.

Sasja Beslik

“We have the facts in front of us, but we are not willing to address the issues of wealth distribution, who are the actual polluters, and how is the system perpetuating this.”

With COP26 fast approaching, pressure is growing on government leaders to show they are serious about providing a roadmap for business to tackle global warming.

“It would be very good if all the parties at COP could discuss how we can change global corporate charters for running businesses from a sustainable development goals perspective. That would be a perfect thing for them to discuss. I would be very happy to hear about that,” said Beslik.

Assets in sustainable investment funds have doubled over the past four years to about $3.6 trillion, according to the IMF's latest report. It stated that investments of around $20 trillion will be required by 2050 to achieve the goal of reducing worldwide carbon emissions to net zero.

“Proper regulatory oversight and verification mechanisms are essential to avoid greenwashing,” it said.

BURDEN OF PROOF

Sir Dieter Helm, professor of economic policy at the University of Oxford, noted on the call that the emphasis was on investing institutions and fund managers to demonstrate the effectiveness of their sustainability strategies.

A proliferation of pledges by asset managers and asset owners on addressing climate change, for example, are being carried out without any connection with the primary economy, he claimed.

Helm said that the carbon offset business, for example, is open to misuse and greenwashing. “The idea that companies can turn to the natural environment and to carbon capture and storage (CCS) is a fantastic opportunity, but also a big challenge. I can see why environmentalists are concerned about the idea that we can have a licence to carry on polluting, as long as we plant enough trees.”

Tariq Fancy, the former CIO for Sustainable Investing at BlackRock, has become a prominent critic of green investing, describing it as “a deadly distraction”.

Tariq Fancy

His view is that fund management firms selling ESG products are complicit in the deception. “That’s just the way the system works. The narrative around these products is presented in a way that misleads the public, and everyone in the industry knows that.”

DWS whistleblower Desiree Fixler said last month that: “We’ve moved from a world of ESG euphoria and we are now in a world – unfortunately because greenwashing has become so pervasive – of scepticism and cynicism.”

That’s why there has to be mandatory compliance on low carbon commitments, according to Fancy.

“Capital won’t flow in the direction we need it to until government regulates and starts to provide new guidelines to work around. If you have a carbon tax in place, you’ll suddenly see an avalanche of capital moving towards green alternatives.”

Fancy and Beslik both stated on the call that corporate charters on fiduciary duty are at odds with the longer term public aspiration for containing global warming and fostering sustainability.

Business and markets must serve society and not the other way around, they said. Furthermore, the checks and balances need to be more stringently applied. “Otherwise, who can investors trust to ensure that the sustainability accreditation is good and proper, and not just what corporates might like to underpin their greenwashing?” said Beslik.

“This matters because, with carbon offsets, each circumstance is different and it’s not possible to have simple rules, like in emissions trading schemes. So there is a core role for certifiers and parties with genuine independence,” he added.

CONNECTING THE DOTS

Harriet Lamb, CEO of the climate not-for-profit firm Ashden, said there was no question that ESG investing is falling short. “The question is where have all the trillions gone? We work with people right on the frontline of climate innovation, many of whom are unable to find the money they need to scale up their activities. We need to find ways of connecting capital with these projects.”

Within asset management, according to Fancy, only a small fraction of funds specifically targeting an ESG outcome actually have any impact, by providing fresh funding to innovators.

“In the public markets, there is no mechanism for an investor to have that kind of impact. The specially created ESG fund not only doesn’t create impact, it creates the impression that a company is doing something when it’s not.”

In his view, “it’s cheaper to market yourself as sustainable rather than make any long term investments to transform your business model.”

Lamb urges a complete rethink of responsibilities to the next generation. She reiterated the need for stricter regulation, noting that in the EU there has been a shift. European regulations introduced in March this year require fund groups to provide information about the ESG risks in their portfolios.