The rising popularity of sustainable investing — and the controversies surrounding it | CBC News (2024)

Figuring out how you should invest your money is no simple feat.

Now, there's an extra wrinkle to take into consideration, withgrowing concern over "greenwashing" in the financial world.

The term is used to describe misleading information about a company's environmentalperformance, and it has come into focus as people and governments paymore mindto the impact businesses have on the environment and society.

Corporations and investors are also increasingly considering risks associated with a company's operations through an environmental, social and corporate governance (ESG) framework.

  • BlackRock, world's largest asset manager, changing its focus to climate change

ESG-related risksrange from the carbon footprint of a company, to its labour practices, to the diversity of its workforce.

"Interest in ESG factors, as part of investment decision-making, has clearly been increasing significantly over time," saidAlexander Dyck, a professor of finance at the University of Toronto.

But asauthorities, too, turn more attention toESG ratings and disclosures, debate is bubbling aroundwhether theseinvestments are exactly what they claim to be.

On May 31, German police raided Deutsche Bank as part of a probe intosuspected greenwashingby its asset management firm. And morerecently, the U.S. Securities and Exchange Commissionbeganinvestigatingsimilar accusations linked to Goldman Sachs.

In both cases, there are suspicions they overstated the extent to whichtheir investments were drivenby ESG principles.

The rising popularity of sustainable investing — and the controversies surrounding it | CBC News (1)

ESG goes mainstream

The increasing interest in ESG is evidenced by therapidly growing number of organizations who have become signatories of the Principles of Responsible Investing (UNPRI), a United Nations' supported organization.

More than 4,000 investors have signed on to the UNPRI, with more than $120 trillion US in assets under their management. The UNPRI advocates for six principles ofresponsible investing,with the first being a commitment to "incorporate ESG issues into investment analysis and decision-making processes."

  • ColumnHow to avoid greenwashing in 'sustainable' investing

There's also a growing interest in sustainable investing among the public, and young people specifically.

According to the Royal Bank of Canada, their InvestEase business has seen a 56 per cent year-over-year growth in the number of "responsible investing" accounts. More than 50 per cent of the account holders are underthe age of 35.

Different types of 'sustainable' investing

Sustainable investing is an umbrella term used to describe the different ways of taking into account non-financial factors in investment decision-making.

The most common approach is an integration approach, where ESG factors are taken into consideration in the decision-making of a company or the composition of an investment. This approachmay tilt a portfolio in favour of investments that score higher on ESG.

Socially responsible investing (SRI) takes things one step further by excluding certain types of investments altogether, such as alcohol, tobacco or fossil fuelcompanies.

LISTEN | Tips on how to make green investment choices:

The rising popularity of sustainable investing — and the controversies surrounding it | CBC News (2)

Saskatoon Morning10:16With ‘Invest in Our Planet’ as this year’s Earth Day theme, we get tips on how to make green investment choices

Sustainable investing is more popular than ever, but what's sold as sustainable might not actually match up with our own values. Guest host Heather Morrison speaks with professor Brooke Dobni who shares what you need to know to impact the planet through your cash.

Then there's impact investing, where the goal of an investor is to maximize social good through their investment.

Taking an ESG-integration approach is the most common of the three, said Dyck, noting there's usually a financial cost to excluding sectors or industries from a portfolio.

"[The] exclusion criteria is, I think, a little bit of a tricky path for most investors to fall on, because there's almost inevitably a cost that you don't fully understand," he said.

How sustainable is sustainable?

One of the main controversies around ESG investments is how they are assessed.

Typically, investment managers decide which components of ESG to emphasize and those preferences will drive decision-making, saidDiane-Laure Arjaliès, an associate professor at Western University's Ivey School of Business.

"There's a range of green and so … something that is ecological for you, may not be ecological for someone else," she said.

Investment managers will often use ESG data that are developed in-house or by ratings agencies to make their decisions. But theratings from one agency to another can differ, depending on the weighting of different ESG criteria, which is sometimes another point of controversy.

People often mistakenly assume that the purpose of using ESG criteria is to maximize social good, when, in reality, it's a framework of assessing risk to a company, saysAlexandria Fisher, a sustainable finance expert who hasworked for institutional investors and government on ESG.

"There is a fundamental misunderstanding of what ESG ratings are—and I think that's causing the tension," she said. "They don't provide an indication of really how the company is impacting the broader world."

Last month, for example, Elon Musk called ESG a "scam" after Tesla ranked lower than ExxonMobilon ESG by S&P Global.

Exxon is rated top ten best in world for environment, social &amp; governance (ESG) by S&amp;P 500, while Tesla didn’t make the list!<br><br>ESG is a scam. It has been weaponized by phony social justice warriors.

&mdash;@elonmusk

But Fisher saidTesla's low rating was no surprise for those from the ESG ratings field, because of concerns related to its overall social and governance performance.

"There's a lot more discussion around climate risk right now and the environmental side, when governance and social are equally important to a company with such an extensive supply chain," said Fisher.

A movement to standardize ESG

When it comes to individual investors, greenwashing is a big concern,Fisher said, because it's difficult to do your own research and financial advisors aren't always well-trained on sustainable investing.

"The biggest change we need is more transparency around the [ESG] information, as well as standardized information," she said.

Standardized information might be on the way.

On Wednesday, the formation of the Canadian Sustainability Standards Board(CSSB) was announced, withplans tobe operational by April 2023.The CSSB will work with the International Sustainability Standards Board to develop international sustainability disclosure standards.

These international standards will be voluntary, said Lisa French, vice-president of sustainability standards at the Auditing and Assurance Standards Oversight Council, one of the two groups that approved the CSSB. Whether they become mandatory would be up to securities regulators and legislators.

"What it does is it ensures that all companies are applying the same set of standards," said French. "So they're all asked to—or required to, if they become mandatory— report on the same elements and to use the same methods, metrics and methodologies."

The development of disclosure standards would be beneficial for companies, ESG ratings agencies and investors, said French, as they would develop a level playing field.

"Having a structured way to approach sustainability considerations, particularly climate change—this is all good news for us as regular citizens."

As an expert and enthusiast, I have access to a wide range of information and can provide insights on various topics. In this case, I can provide information related to the concepts mentioned in the article you provided. Let's dive into it!

Greenwashing in the Financial World

"Greenwashing" refers to the practice of providing misleading information about a company's environmental performance. It has become a growing concern as people and governments pay more attention to the impact businesses have on the environment and society. The term is often used in the context of environmental, social, and corporate governance (ESG) frameworks, which assess the risks associated with a company's operations.

ESG Framework and Risks

ESG-related risks encompass various factors, including a company's carbon footprint, labor practices, and workforce diversity. These factors are increasingly considered by corporations and investors when making investment decisions. The interest in ESG factors has been steadily increasing over time, according to Alexander Dyck, a professor of finance at the University of Toronto .

Greenwashing Investigations

There have been recent cases of investigations into suspected greenwashing practices. For example, German police raided Deutsche Bank as part of a probe into suspected greenwashing by its asset management firm. The U.S. Securities and Exchange Commission has also initiated investigations into similar accusations linked to Goldman Sachs. In both cases, there are suspicions that the extent to which their investments were driven by ESG principles may have been overstated.

Growing Interest in ESG

The interest in ESG is evidenced by the increasing number of organizations that have become signatories of the Principles of Responsible Investing (UNPRI), a United Nations-supported organization. More than 4,000 investors have signed on to the UNPRI, managing over $120 trillion US in assets. The UNPRI advocates for incorporating ESG issues into investment analysis and decision-making processes .

Types of Sustainable Investing

Sustainable investing is an umbrella term that encompasses different approaches to taking non-financial factors into account in investment decision-making. The most common approach is an integration approach, where ESG factors are considered in the decision-making process or the composition of an investment portfolio. Socially responsible investing (SRI) goes a step further by excluding certain types of investments, such as alcohol, tobacco, or fossil fuel companies. Impact investing aims to maximize social good through investments.

Controversies and Challenges

One of the main controversies surrounding ESG investments is how they are assessed. Investment managers often decide which components of ESG to emphasize, and different ratings agencies may have different criteria and weightings. This can lead to discrepancies in ratings and controversies regarding the assessment of ESG investments. Additionally, there is a need for more transparency and standardized information in the ESG field, as well as better training for financial advisors on sustainable investing .

Standardization Efforts

Efforts are being made to standardize ESG information and disclosure. The Canadian Sustainability Standards Board (CSSB) was recently announced, with plans to develop international sustainability disclosure standards in collaboration with the International Sustainability Standards Board. These standards, if adopted, would ensure that companies report on the same elements and use the same methods, metrics, and methodologies. The development of standardized disclosure standards would provide more transparency and a level playing field for companies, ESG ratings agencies, and investors.

I hope this information provides a good overview of the concepts mentioned in the article. If you have any further questions or need more specific information, feel free to ask!

The rising popularity of sustainable investing — and the controversies surrounding it | CBC News (2024)
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