Greenwashing biggest challenge of ESG investing, say institutions
Institutional investors view greenwashing – where an organization presents itself as more environmentally friendly than it actually is – as their top concern as they attempt to integrate ESG factors into investment decisions, according to a new survey.
Around six in 10 respondents (59 percent) identify greenwashing as a challenge when selecting sustainable investments, finds the Schroders Institutional Investor study, which garners the views of 750 industry professionals around the world.
The challenge of identifying greenwashing is becoming harder as ESG concerns become mainstream for investors and portfolio companies, leading to an explosion in the number of investment products labelled as sustainable.
Regulators hope to rein in greenwashing through projects such as the EU taxonomy for sustainable activities, which will define what can and can’t be classified as sustainable. But there are worries that badly designed regulation will simply make it easier for greenwashing to occur, as organizations can follow a tick-the-box approach to presenting their products as environmentally friendly.
Investors also have wider concerns about the quality of ESG information available to them, notes the Schroders research. More than half (53 percent) of respondents say a challenge of sustainable investing is a lack of transparency and recorded data, up from 40 percent two years ago.
Performance concerns related to ESG investing are fading, however. Thirty-eight percent of the respondents identify expected returns as a challenge, down from 51 percent in 2018.
‘It is, of course, encouraging to see that investors’ long-held performance concerns about sustainable investing continue to subside,’ says Andy Howard, global head of sustainable investment at Schroders, in a statement.
‘We have argued for many years that investing sustainably with a strong focus on robust returns should not be mutually exclusive. Indeed, thoughtful and considered approaches to sustainability are at the heart of the objective of delivering long-term investment returns.’
Looking beyond ESG issues, the study finds high investor confidence about the mid-term outlook for their investments. The average expected annual return over the next five years is 6.4 percent, a rise from 5.6 percent in 2020. The proportion of investors predicting outsized returns of above 9 percent per year has more than doubled, from 5 percent in 2020 to 13 percent this year.
Investors are also more bullish about hitting their targets, finds Schroders: 46 percent of respondents say they are confident they will meet their expected returns, up from 33 percent last year.
‘Clearly, confidence is rising. This is due to a combination of vaccine success, increasing consumer demand across the globe, and indications that the global economic recovery from Covid-19 could be relatively swift,’ says Keith Wade, chief economist at Schroders, in the statement.
‘[But] expectations are even higher than before the pandemic hit, indicating a more sustained shift in confidence. It could be that even professional investors are being swayed by the strong real returns achieved by both equity and bonds in the past decade.’
Wade says investors will need to manage a number of challenges to achieve their desired goals, such as the low-interest-rate environment, aging populations and the emergence of new technologies.
‘To survive, investors should be considering whether to invest by theme – to capture the growth from global super-trends – or perhaps diversify into fast-growing areas of private assets, such as private equity, infrastructure debt or real estate,’ he says.