Fear of Greenwashing is a Barrier to ESG Investing
A poll performed by IQ-EQ, an investor services company, revealed that worries about “greenwashing” are preventing ESG investing.
IQ-EQ's ESG service assists clients in remaining compliant, managing their ESG data, and meeting ESG objectives by handling all administrative, data, and reporting obligations throughout the fund’s lifecycle.
According to nearly two-thirds of respondents, fear of "greenwashing" is the most significant hurdle preventing investment firms from implementing sustainability into their investment strategy or marketing their sustainable credentials.
Although different organisations describe different requirements, the lack of clear, standardised ESG criteria is a source of concern.
The EU’s Sustainable Financial Disclosure Regulation (SFDR) has yet to reach its full potential, with gaps in understanding and compliance that ESMA is working hard to close.
There is a clear shift from “tell me” to “show me” as sustainable finance regulation becomes more stringent and concerns about greenwashing increase. Managers are under increased pressure to back up the claims they make in their marketing materials and show how ESG is integrated into the fund’s overall lifecycle.
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Even the most effective investment firms are struggling to clear the regulatory hurdles required to demonstrate their impact, especially when emerging markets and SME portfolio companies are involved, which lack the necessary regulatory expertise, internal procedures, and, most importantly, data to meet the reporting requirements.
Investors are becoming more sceptical, and successful investment businesses are struggling to surmount the regulatory hurdles required to demonstrate their impact.
Businesses from emerging markets and small and medium-sized enterprises (SMEs) are particularly involved because they lack the necessary regulatory experience, internal procedures, and, most importantly, data to meet reporting obligations.
The ESG Director, Lyons O’Keeffe, commented on the results, saying: “The poll result is concerning, but not surprising. The lack of clarity from global regulators is prompting investors to avoid ESG labelling because of potential repercussions linked to greenwashing. Our constant interactions with clients demonstrate that it’s not for the want of trying, as investors are very interested in the sector, however, they fear miscommunication will damage their reputation or worse. This suggests that clients require additional support to engage in the right way; it’s key that the investment industry does not shy away at this critical time.”
SFDR has been a crucial step in implementing the European Green Deal, which aims to make the EU economy sustainable and carbon neutral by 2050. However, when the regulations are put into place, care must be taken to avoid making well-intentioned managers pause on their sustainability journey and thereby slowing the flow of capital into the right investments.
Source: Private Banker International