How Green Is My Bond Fund?

Art by Anja Sušanj

Plan sponsors, now free to invest sustainably, have likely met another river to cross: How do they confirm a potential investment, marketed as green, truly is?

In fact, for 44% of investors surveyed by Quilter Investors, in May, “greenwashing” of investments was their greatest concern when it came to environmental, social and governance (ESG) investing.

The term “greenwashing” first appeared in a 1986 essay by environmentalist Jay Westerveld. There he claimed that a hotel asked its guests to reuse their towels, purportedly to save the environment but in reality to save it money. Since then, the meaning has broadened to what S&P Global, in a recent comment on its website, describes as “making exaggerated or misleading environmental claims, sometimes without offering significant environmental benefits in return.”

S&P Global noted Quilter’s findings, yet called such fears generally groundless. There “seems to be little evidence [the practice] has become widespread in reality,” it wrote, indicating that the maturing of the market, stakeholder demands and institutional efforts have had a positive effect.

Still, the comment mentions a sprawl of issues yet to be resolved. Many make it hard to compare investments or gauge their impact quotient: inconsistencies ranging from how funds are labeled to “what [even] constitutes a ‘green’ or ‘social’ project,” poor transparency, no standard measures for performance or reporting, and no regulation, along with a burgeoning demand for ESG products.

Uncertain Numbers

“The mainstreaming of ESG investing has had a galvanizing impact on how sustainability factors are incorporated into investment decisions, including at the financial instrument level,” wrote S&P Global, estimating that “sustainable bond issuance, including green, social, sustainability and sustainability-linked bonds, could collectively exceed $1 trillion this year—a near five-times increase over 2018 levels.” That is, it said, assuming the numbers reported and totaled are trustworthy. If some stock funds are any indication, that trillion could need downsizing.

According to an InfluenceMap study reported on in the Financial Times, 130 supposedly climate-focused funds—e.g., “fossil fuel reserves free” or “fossil fuel screened”—collectively hold $153 million in shares of either oil company or oil service company stock. It also reported that 72 funds “were found to be misaligned with the Paris agreement goal of limiting global warming to well below 2 degrees Celsius.” Total assets in the tainted funds were more than $67 billion.

“It’s very hard for investors to be able to accurately ascertain whether funds that are branded [as climate-focused] are actually Paris-aligned or not,” InfluenceMap analyst Daan Van Acker was quoted as saying.

What Does That Mean?

Investors trying to determine a company’s compliance with ESG standards will likely encounter vague terminology and conflicting naming conventions. The “Journal of Environmental Investing Report 2020” cited “over 20 different labels[—such as green bonds, ESG bonds and climate awareness bonds—]being used for sustainable debt instruments, which all align with different [ESG] guidelines and frameworks,” S&P Global wrote.

Investors may also be unclear as to whether a green bond’s proceeds, intended to finance new projects, actually get used that way or have an environmental impact, the comment says, referring to findings by the Climate Bonds Initiative. At fault are the lack of—or, when they exist, relative—performance standards and the dearth of results reporting, said S&P Global, which has observed that proceeds often go to refinance existing projects.

Regardless, having evaluated all of the bonds in its database, “[CBI] has ultimately concluded that greenwashing overall remains rare as issuers genuinely finance green projects and assets,” the comment said.

Sustainable, social and transition bonds, newer to the market than green bonds, have similar limitations and challenges, evoking the same heightened concerns about “washing,” the firm said.

In “social-washing,” investors suspect an issuer of “overstating the social impact of its financial projects without adding social benefits,” it explained, adding that social impact is less definite than environmental and therefore harder to measure. Bond issuers are more apt to look at “dollars spent, loans issued, number of participants or hospital beds added,” which bypasses the essential human component in how much social outcomes were improved.

Summing up, S&P Global credited investor scrutiny for the progress made in advancing “the transparency, robustness and credibility of sustainability commitments.”

“It’s becoming clear that entities can no longer simply state their sustainability goals or long-term targets,” the firm continued. “Stakeholders want to see companies produce detailed transition action plans, backed by data and shorter-term interim targets, which demonstrate strong commitments toward a more sustainable future.”

S&P Global pointed to work underway, much of it in Europe and voluntary, to bring uniformity, clarity and accountability to the ESG market.