by Natacha Guerdat, Head of Research
Sustainable investing has made remarkable progress in recent years and is no longer seen as a niche discipline within the industry. Sustainable Finance Disclosure Regulation (SFDR) alone will not address the issue of greenwashing, but it does contribute to it.
Despite this growing popularity, challenges remain and there is a real threat that investors will lose heart amid growing signs of greenwashing, complicated regulatory upgrades. Indeed, both the favorable interest and the reactions against ESG are currently at their firmament. This positioning generally reflects a conviction. The integration of ESG factors would create value in an investment process or it would represent a political act.
Larry Flink, CEO of BlackRock, recently announced that he would no longer use the term ESG, as it has been politically “weaponized”. He advocates a more specific approach and talking about distinct sustainability issues, such as, among others, decarbonization or certain social issues.
Like traditional investment preferences, sustainable finance includes various approaches that each serve a particular purpose and therefore display different shades of green. There are no standards, especially regarding terminologies and other acronyms.
The SFDR was introduced by the European Union to protect investors and consumers by improving transparency and combating misleading or exaggerated sustainability claims in financial products and services.
This regulation requires financial market participants, such as asset managers or insurance companies, to make information available on the environmental, social and governance (ESG) characteristics and sustainability objectives of their products. This includes information on management processes, potential negative impacts on sustainability factors and their alignment with the sustainability objectives pursued.
What the investor needs is information. This regulation, for example, makes the distinction between materiality of the impact and financial materiality more explicit. A fund managed using a financial materiality rating should not be marketed with a sustainable designation.
Greenwashing is frequently a notion of perception. In response to the obvious challenges that exist and impact a growing part of the population, such as the climate crisis or the worsening of inequalities, we can understand the growing enthusiasm of investors for sustainable finance. However, enthusiasm is not enough. The debate should not start or stop on the role of finance, but much more broadly to change our industrial system. The investor can accompany this transition, but cannot replace it. Expectations for sustainable investment products need to be clarified and careful analysis is also essential to effectively integrate ESG factors into the investment process. And this analysis cannot be done without transparency and a form of uniformity. This is indeed the objective pursued by the SFDR.