How green is my investment? It’s hard to tell
Flawed data leaves investors guessing at what’s environmentally responsible and what’s not.
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Investors are flocking to green and socially sustainable investments: It can be good for one’s conscience, reputation and, increasingly, returns. But that momentum is based on a patchwork of data, to the frustration of bankers, the authorities that regulate them and the NGOs that monitor them. It’s hard for investors to know how sustainable their investments are, and even harder for watchdogs to hold companies accountable for their claims. To address the gaps, several global institutions and networks are teaming up to push for more disclosure and develop standardized systems for comparing data.
“Too many (investment) frameworks are heavy with flawed data,” Erika Karp, CEO of Cornerstone Capital, told POLITICO. Sharan Burrow, secretary general of the International Trade Union Confederation agrees, saying that too many companies see sustainability as a branding exercise rather than a fundamental reset of their strategy and operations. “We need a much more robust set of criteria around ESG (environmental, social and governance) and investors need to be driving this,” Burrow said.
Fitch Credit Ratings believes the sustainable investment landscape is changing. In a new ESG report, Fitch President Ian Linnell said that in response to investor demand, Fitch now maintains “over 140,000 individual Environmental, Social or Governance scores for more than 10,000 entities and transactions worldwide.” But Linnell admits that “ESG scores of all types remain notoriously incomparable.”
That in turn means that “transparency in accounting practices is essential,” writes ariel Pinchot of the World Resources Institute (WRI), a green NGO. However, organizations ranging from WRI, to Refinitiv, a financial data firm warn that many companies commit to reducing emissions or investing in clean energy without consistent and clear plans for doing so. WRI says many banks’ sustainable finance plans are often inconsistent with their fossil fuel investments, and offers a Green Targets Tracker to call out those falling short.
The International Monetary Fund agrees there’s a problem with the lack of actionable data. The fund’s 2020 Global Financial Stability Report warns that investors are underestimating the financial risks from climate change, and urges companies to start disclosing their exposure. That’s chiefly because of “a daunting informational challenge,” which leaves them stuck trying to apply long-term data and trends to shorter-term investment decisions, without the benefit of standardized national disclosure systems to enable comparison.
Fossil fuel investment offers a developing case study of how the data gaps could cause problems for investors. Carbon Tracker, a think tank that analyses capital markets, published a report this week warning that because of behavior changes brought on by the Covid-19 pandemic, coinciding with an oil price war, the value of the world’s fossil fuel reserves could fall by two-thirds in coming years. That could create “a significant threat to global financial stability,” according to the report, but without more real-time and comparable data, it’s hard to know how high the risk is.
Another case in point is the investment gap around the United Nations Sustainable Development Goals. The U.N. estimates at least $5 trillion in extra investment is needed to achieve these goals by their 2030 deadline, but companies lack global data sets to figure out how to invest more efficiently to achieve the goals.
Help is on the way. The United Nations and the Institute of International Finance teamed with a group of universities and others to launch the “Future of Sustainable Data Alliance”at the World Economic Forum in January.
A separate initiative — the International Network for Sustainable Financial Policy Insights Research, and Exchange (INSPIRE) — is working on 21 projects aimed at “Building the analytical foundations for greening the financial system.” The organization thinks the U.S. Federal Reserve and the world’s other central banks should be more like the Bank of England, which is planning to introduce climate stress tests for British banks. The Ceres Accelerator for Sustainable Capital Markets — an investor advocacy organization — laments in a new report that, “U.S. financial regulators are far behind their counterparts in China, Europe, the U.K., South America and Canada.”
The Science Based Targets initiative says that 377 companies have publicly committed to using its system for setting climate targets, including more than 50 banks.
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U.S. states set up green banks: My colleague Samantha Maldonado reported that
New Jersey will join neighbors New York and Connecticut in funding loans and grants to carbon-cutting projects, such as community solar and energy efficiency retrofits. New Jersey is seeding the project with $12 million in annual revenue it collects from the Regional Greenhouse Gas Initiative, a carbon cap-and-trade program. In 2019, the nine global members of the Green Bank Network committed a total of nearly $15 billion, mobilizing $50 billion in public and private capital.
Challenges loom, however. As states struggle to close budget gaps torn open by the coronavirus pandemic, green banks could get a cold shoulder from some of the policymakers who created them. Connecticut’s green bank, for example, is funded by $26 million from the state’s clean energy fund and about $4 million from Regional Greenhouse Gas Initiative proceeds. But in fiscal 2018 and 2019, state lawmakers diverted $28 million in clean energy funds and $4 million in greenhouse gas funds that were planned for the bank. Bank officials filled the gap by issuing bonds, cutting operating expenses and transferring staff to an associated but independent nonprofit.
U.K. pension giant rejects coal: The manager of the U.K.’s largest private pension scheme — the Universities Superannuation Scheme — will stop investing in companies with thermal coal holdings. USS Investment Management Limited, which handles around $85 billion worth of assets, intends to exclude companies that make more than 25 percent of their revenues from coal used for electricity generation.