18th October 2011
The week features a whole series of meetings, talks and conferences planned to push the idea that it makes investment as well as environmental sense to concentrate money on companies that are positively green. This means rejecting firms whose activities cause pollution (physical or mental) with activities ranging from carbon emissions to treating staff badly.
There is certainly an appetite for information around green and ethical issues – last month Standard & Poors launched an index to measure carbon emissions of the leading Japanese companies.
But after three decades of Socially Responsible Investment – often with investors paying a premium for greenness (those necessary ethical checks and balances have spawned a whole industry) – is there any evidence that it has worked. Or is the whole thing greenwash? Greenwashing is the way certain organisations claim to be green while pursuing non-green activities. Here are some recent examples of greenwashing.
But while many investors are prepared to back SRI funds, they do need to know where they are going. The warning signs of greenwash confusion have been around for some time – in early 2008, The Financial Times listed many of the problems investors faced in finding a fund that they could be comfortable with. This focused on the divide between ethical and green as a company involved in green practices may not be ethical. For instance, a firm making solar panels could treat staff badly.
The FT warning was aimed at retail investors. Since then, there have been a number of issues of "green" bonds aimed at institutional investors including many bonds from the World Bank which help finance infrastructure and health projects in developing nations.
These have been largely successful with some large investors prepared to take a marginally lower coupon in return for feeling good (and transmitting that to fund members).
However, the institutional investor group on climate change says no fund should accept a lower yield just because an issuer claims green credentials.
Now corporates intend to follow the lead of governmental organisations. They reckon they can tap a large market, especially in pension funds where member pressure can push towards SRI commitments.
But this can lead to confusion – there is a lack of any recognised set of standards to separate the green from the greenwashers. Investors would have to trust either their own judgment or employ agencies that may not always use the same criteria. That lack of clarity could lay pension funds and their trustees open to legal challenge, as well as exposing the fund to reputational risk.
One solution that potential environmental and green bond issuers are floating is to have a verification system. The question is who would do it and what standards would be put forward.
One suggestion is for the National Association of Pension Funds or the Association of British Insurers to set up a verification process, perhaps with several standards such as gold, silver or bronze.
It sounds good in theory. But in practice, these organisations have no clear idea of how they could come up with a system that was both fair to issuers and applicable to a variety of members. Another idea is for ratings agencies to verify and label green bonds – but again the agencies are not in best odour following the banking crisis, especially with investors at the ethical end of the spectrum.
Pension funds are sceptical. Christina Kusoffsky Hillesoy of Swedish pension fund AP3 told the Financial Times that the fund had been approached by banks selling green bonds but she was "afraid that there would be a lot of green bonds where it would just be greenwashing. I just don't know how a verification system would work."
There is nothing new in this. Back in 2003, US academic William S Laufer said: "Much less has been said (in SRI literature and research
) about the integrity of corporate representations resulting in a corporate inclusion or exclusion…..In its most favourable light, a ‘specious gloss' is said to characterise social reporting initiatives in the United States and Europe."
Laufer also quoted the rise in SRI indices (including the sometimes controversial FTSE4Good), and the sheer weight of money into the funds against a background of doubt over screening methods, and concern over performance.
"Are funds greenwashing clients?," asks Seb Beloe, Mindful Money blogger and head of SRI research at Henderson Global Investors. "No, as it's our job to spot this both at the corporate and the technology levels. As for companies, they are trying it on less although there are more incentives for firms to greenwash to show a better social or environmental performance."
Beloe says that a move towards certification already exists in the shape of the climate bond initiative. This project, which started in December 2010, is designed to promote integrity and liquidity into the green bond market.
So as we continue with National Ethical Investment Week, is it fair to ask whether SRI is delivering the goods. There is, however, no easy answer. Analysts can slice and dice past performance figures in more ways than most of us have had hot dinners. If you look, you can find the answer you want whether pro or anti SRI – opt for a time period, select your fund or funds and then find a "control" against which to measure your choice.
"There is a growing body of evidence to show that over the long term – three years plus – issues ignored by mainstream investors start to work their way through," adds Beloe.
Perhaps, the only way is to adopt the mantle of the true believer. For those investors, it is wrong even to pose the question. For others, the jury is out – and will remain so.
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