Sustainable finance products are in vogue. But what does sustainable even mean? Are these finance products as green as they claim to be? The underlying data and ratings raise doubts. And DWS recently showed that green appearances can be deceptive.
Wiesbaden, September 17, 2021. In times of Fridays for Future, climate change and environmental disasters, sustainable finance products are experiencing an upward trend. In the first quarter of 2021 alone, more green bonds were issued than in the whole of 2017. The promise sounds too good to be true: investing one’s assets consciously, earning returns and doing something good for the environment or society in the process. But reality shows that this is not as simple as it seems. The Deutsche Bank fund subsidiary DWS is in the middle of a scandal: the supposedly “green” investments, in reality have little to do with sustainability. BaFin and the SEC are investigating these allegations. An isolated case? Probably.
Green vs. greenwashing
Not everything that claims to be sustainable is actually sustainable. So-called greenwashing regularly takes place in business. In these cases, companies pretend to be environmentally friendly even though this is not the case. There are still no fixed regulations on what can be labelled as sustainable. The EU Commission wants to change this with the EU taxonomy and has developed a comprehensive definition of sustainability, which is still being expanded.
BaFin also wants to provide stronger protection against greenwashing and published a draft guideline for sustainably oriented investment assets. These are to ensure, for example, that capital management companies invest at least 75 percent in sustainable assets if they want to call their finance product sustainable. This raises the question how the underlying data is collected from the companies being invested in? And how reliable is this published information?
Unfortunately, little or no reliance can be placed on the data that has been available to date, because there are as yet virtually no rules for companies to adhere to. Providers of finance products therefore mostly use the data of so-called ESG rating agencies for their decisions. These in turn collect their information through algorithms that evaluate the previously published information of the companies with the help of artificial intelligence. Unfortunately, these results are quite inaccurate and also very difficult to comprehend, as rating agencies keep the criteria and weightings used to arrive at their assessment non-transparent.
ESG reports: Transparent information? Missing!
In our Global ESG Monitor, we examined the sustainability reports of the world’s largest listed companies from the DAX, EUROSTOXX, Dow Jones and ASX 50. We found that even there, financially relevant data was often missing or the reports contained only vague assertions instead of tangible data. For example, only 39 per cent provided information on ESG risks that could affect their company. As a result, reports scored an average of only 26 out of a possible 66 points. Getting a picture of a company’s ESG performance in this way is impossible.
The EU taxonomy and BaFin’s new draft directive are steps in the right direction. The world’s largest companies should not be allowed to ignore their global responsibility. The issue of ESG is not a fad, it is essential to ensure that life on our planet continues to be worth living. Sustainable investments are an important part of the whole. But for this to happen, transparent and relevant data must be available to clearly determine whether a company and the investments it plans to make are sustainable or not. This also benefits the companies themselves. Investors appreciate it when companies report transparently and will prefer to invest their money where it is used for good purposes.
We are happy to shed light on this and support your company in implementing successful ESG reporting. Contact us here to sustainably improve your ESG strategy.
Michael Diegelmann: Founder and Board member
Michael Diegelmann has gained experience in over 150 communications projects (IPOs, investor relations, ESG, M&A, crisis) and has been working in the field of capital market communications since 1997. He is the author of 16 book publications relevant to the capital markets and was previously project manager at an international consulting firm and a Frankfurt brokerage house.