Ethical investing is a thematic that has been growing in popularity as environmental concerns reach a tipping point. However, as we take our first steps into 2022, there are concerns festering among the ESG investing community.
On one hand, it's a major positive to see investment banks pouring capital into companies geared towards a sustainable future. Meanwhile, the incentives for bad actors to disingenuously appeal to environmentally conscious investors has never been as high.
This creates a challenge for investors to navigate within the ESG investing landscape.
A wolf in sheep's clothing
The risk posed to investors has caught the attention of Australia's corporate regulator. In December, the Australian Securities and Investments Commission's (ASIC) commissioner Cathie Armour warned that publicly listed companies could encounter 'enforcement action' in situations where climate risk details have been fudged.
Moreover, the warning is not the only one of its kind across global markets. In the European Union, a group of investors have been pushing back on the labelling of natural gas investments as 'sustainable'. This followed the drafting of a climate-friendly investing rule book, of sorts, by the European Commission to define gas and nuclear investments as green.
In a similar fashion, a study conducted by the University of California and nonprofit As You Sow, found a weak correlation between ESG branded exchanged-traded funds (ETFs) and their ESG rating.
As You Sow CEO Andrew Behar commented:
We see funds with ESG in their names getting F's on our screening tools because they hold dozens of fossil fuel-extraction companies and coal-fired utilities
Importantly, this highlights the risk to hopeful ethical investors. While at face value it may appear an ESG investment, it might really be a case of greenwashing.
The green side of ESG investing in 2022
It's not all doom and gloom for the green investing niche in 2022. Currently, the issue around potentially deceptive ESG reporting is due in large to the lack of standards. However, that could be set to change with the development of new guidelines by the International Sustainability Standards Board.
In contrast to the current loose framework, the ISSB will be looking to introduce a set of standardised metrics. The hope is this will lessen the grey area where greenwashing and vagueness can take place.
Another positive for ESG investing is the growing adoption among institutional investors. For example, IFM Investors — which is owned by 23 Australian industry super funds — has hit a milestone on its green ambitions. The firm's private equity segment has become the first in Australia to reach carbon neutrality.
Indeed, 2022 could be an interesting year for ESG investing. Excitement remains high in the likes of lithium, hydrogen, and other 'green' alternatives.
