Greenwashing—falsely attracting capital by claiming it will be used for sustainable projects—is the “fake news” of investing. The term has roots in the 1980s when it was aimed at big corporations that made symbolic “green” gestures but were nonetheless culpable for net contributions to pollution, or what we today call “climate change” (a greenwashed term itself that displaced “global warming”). 

But with the growth of environmental, social and governance (ESG) investing, which now accounts for about 20% of global assets under management (AUM),1 the stakes are much higher. 

“Greenwashing is a big issue,” says Remy Briand, global head of ESG products at MSCI. The finance firm is a major provider of investment indices and data, much of which is ESG focused. “The way to resolve this is through transparency on dedicated use of proceeds and robust third-party validation of that use.” 

The mention of “transparency”, however, raises the question of how it’s to be achieved. The old answer might have been “more data”. But one problem the financial world faces is a lack of a global ESG taxonomy which means there is no data “gold standard”. Information can therefore be highly inconsistent, making comparison of companies and projects difficult. In turn, that deters investors and helps greenwashers. Many of Asia’s largest investors—the asset owners—such as the Asian Infrastructure Investment Bank, the Hong Kong Monetary Authority and Ping An Insurance, China’s biggest insurer, share this view (their perspectives are shared in The Economist Intelligence Unit report, Sustainable and actionable: An ESG study of climate and social challenge for Asia).

A question investors are starting to ask of ESG is “What’s so green about it?” 

About 600 organisations claim to answer that question, Mr Briand comments. The multitude of data then can muddy the waters more than it clarifies. These entities are all trying to convince investors that they have built the best ratings mousetrap and go on to ask listed and private companies for widely diverging ESG data, exhausting both corporate patience and resources. Such an over-proliferation “can be an excuse to do nothing,” Mr Briand asserts. 

With no overarching taxonomy to define “green” and an excess of providers and methodologies, the space between problems and solutions only gets wider. So the answer can’t be “more data”.

“The important point is that investors need to be explicit about the problem they are trying to solve,” says Mr Briand. For instance, a listed fishing company that operates unsustainably will see its supply collapse—and its business with it. Translating the scenario into conventional financial metrics such as default risk is called “materiality” and is seen by many investors as a more applicable approach. 

Focusing on metrics can do more to influence ESG investment strategies and outcomes than the heavy data burden associated with proving ESG credentials. A shift in focus should help to address issues such as cost of capital which has hampered green bond uptake. It’s not that investors shun the green aspect, but when issuers have to jump through too many hoops to get a bond certified, they walk away. Bureaucracy comes at a cost and it’s a common complaint among issuers that they reap no reward for the extra effort of issuing a green-labelled bond. Again, the extra data leads to fewer green investment opportunities (but more greenwashing ones). 

However, Mr Briand believes change may be on the way. He explains how MSCI has analysed issuers within its own green bond indices and found a difference between those with high green credentials and those with low. “Investors put a premium on those bonds issued by the former. So, regarding the question as to whether investors discriminate between the two, the answer is yes.” Higher demand, when seen as truly accomplishing a green goal, does translate into a lower cost of capital. 

Having a grasp on materiality benefits investors because such company-level transparency can flag risks—from exposure to floods to regulatory action or labour disputes—that negatively impact value.  

Data used in this way could overtake the need for green-labelled financial instruments and the related greenwashing potential. Greenwashing is akin to a cigarette manufacturer touting a one-off charitable donation to lung cancer research. It might look good in the data but we all know what the root cause is. Progress in leveraging capital against climate change depends on better linkage between green goals and quantifiable key performance indicators.

Investors need the ability to apply standardised data all the way through portfolios so that all AUM can be green, not just those with the right boxes ticked. 

Special thanks to Remy Briand, global head of ESG products, MSCI for his insight and expertise on the topic. 

For a deeper analysis on ESG, green credentials and greenwashing see Sustainable and actionable: An ESG study of climate and social challenge for Asia

1 US$17.5trn out of the US$79trn of total estimate from Boston Consulting Group and the US SIF Foundation, cited in the Financial Times, February 26th 2020. https://www.ft.com/content/e969217c-f001-11e9-a55a-30afa498db1b?segmentId=47561bcd-230d-6768-b4a1-deb6edc93a7b

The world’s top 100 asset owners (AOs) represent about US$19trn in assets under management. The largest, and potentially most influential, proportion is in Asia—more than a third of the total. Out of the top 20 largest funds, three out of the first five and nearly half of the total are in Asia.

The Economist Intelligence Unit carried out interviews with some of Asia’s largest asset owner firms, development banks, sustainable investment organisations and influential industry advocates to determine how they saw the growth of environmental, social and governance (ESG) investing in Asia, as well as the AO role in it. In parallel, we review the latest research on ESG investing in the region to give an overview of sustainable investing in Asia. The main findings include:

In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.

Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.

Click the thumbnail below to download the global executive summary. 

Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.