Scrutiny of ESG investing to intensify in coming months

The investment industry is expected to face further scrutiny regarding ESG in the coming months amid a significant backlash against greenwashing.

Federated Hermes head of investment Eoin Murray said that the industry’s lack of understanding regarding impact versus risk has not helped contain the backlash.

“It’s also increasingly clear that too many want to paint ESG matters into a simple good versus bad split, when we all know that it is complex and often involves trade-offs,” he said.

“Perhaps too, we can at last move away from focusing on aggregate ESG scores, for example, rather than doing the hard work to establish meaningful granular data around key material issues.”

Recent research by SEC Newgate Australia revealed that 42 per cent of Australians do not trust claims made by Australian companies about their ESG performance. 

In regards to greenwashing, the ESG efforts of some firms were seen to be superficial virtue signalling with a focus on style over substance.

Earlier this month, ASIC released an information sheet to help superannuation and managed funds avoid greenwashing when offering or promoting sustainability-related products.

The corporate regulator identified a number of areas of improvement, including the need for issuers to use clearer labels in their disclosure and promotions and provide a clearer explanation of how sustainability considerations are factored into their investment strategy.

Mr Murray suggested that it is time to recognise that the gap between climate science and investing needs to be bridged.

“Ultimately, this short-term pain will shape our industry for the better, and we anticipate more players to be walking the talk,” he said.

According to Mr Murray, the next UN Climate Change Conference (COP27) in November will also help drive change, with significant progress expected on commitments made at COP26 last year.

“The key goals of COP27 in Egypt are still unclear because of global political focus elsewhere, finance and the rising cost of living around the world, and the desire to secure energy needs over varying timeframes,” he noted.

“The Synthesis science report from the UN's climate science body will likely be delayed until 2023 and hence not be able to provide a boost to urgency.”

Following the Bonn Climate Change Conference (SB56) this month, which worked towards implementing agreements made at COP26, Mr Murray said that expectations surrounding COP27 were mainly related to how the developed world would meet their financial commitments to the developing world.

“The main takeaway from this interim session was that the global climate process has not stalled or lost ambition despite all the geopolitical events at play,” he added.

Mr Murray also predicted that it was unlikely that COP27 would include any particular moves focused on investment.

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.