The sustainable investment market is still in its adolescence stage – and it is going through a growth spurt. While it is no doubt that the rapid uptake of sustainable investing is impressive, long term health is still not guaranteed. We may compare this to healthy living. Just as showing nutritional information does not guarantee that people will change their eating habits, more sustainability information is necessary but not sufficient for growing sustainable investment.
Today, the word sustainability that used to be a niche topic, is no longer a new term. It is everywhere. It is part of our day-to-day business and personal discussions. It is no wonder, really: about two-thirds of the global economy is attached to a net-zero emissions goal while societies, partly prompted by the pandemic, are becoming increasingly aware of them.
The investment world has not been left behind either.
Financial investors are working around the clock to encourage the flow of funds into sustainability, increasing the growth of businesses with a sustainability tag. In addition, research has shown that sustainability has become a prominent feature in conversations between investors and business owners.
With the rise of the sustainability investment conversations, what could stand in the way of sustainable investment becoming the norm?
The answer: lack of transparency.
Greenwashing, lack of a common language and data
By now, we all agree that the most significant barriers to sustainable investment are concerns around greenwashing and a lack of a common language and data. In fact, the latter, according to a Schroders Institutional Investor Study, is probably one of the most consistent. Unfortunately, it stands through the test of time and is consistent across regions and different institution types.
What is the solution?
Increase clarity and transparency.
As long as there is a lack of transparency and not enough data, investors will always be worried about greenwashing. This only increases the risks and reduces the investment that goes into sustainability. It is, therefore, important for both institutions and the government to look into how to make the process more transparent and provide enough data for the investors.
Greenwashing is a risk as some activities unjustly position themselves as sustainable and attract money intended for sustainable purposes when the reality is quite different. This leaves less money for those activities that can create a more sustainable economic system, severely harming confidence in sustainable investing. This is terrible news for everyone.
Looking at the different sustainable finance agendas that governments around the globe are pursuing, two things stand out;
- There is a need for a taxonomy that classifies which economic activity is sustainable and,
- Companies should embrace sustainability reporting for markets to understand the sustainability risks and how companies are tackling them.
The two steps can offer investors greater confidence, allowing them to allocate money towards what is reported to be more sustainable.
Does increased transparency guarantee sustainable investment?
Increased transparency and sustainability reporting by companies seems to address the areas that investors want to be addressed. The question is: will it work? Will all the additional transparency result in more money flowing towards sustainable investments?
Despite all the new regulations intending to improve transparency, according to a 2021 Institutional Investor Study, a large proportion of investors still think that sustainable investing is challenging.
In fact, the proportion of investors who do not find it challenging has been shrinking through the years, which indicates that sustainable investing suffers from a stubbornly high degree of complexity.
Measuring and understanding social and environmental issues through an investment lens is still very new to many investors. Suppose we see this in combination with the lack of consistency in definitions, data and methodologies. In that case, it should not be surprising that so many still find sustainable investing at least somewhat challenging.
Hence, there is still a lot of work to make investors feel confident that they have all the tools and information to make informed decisions. Unfortunately, this probably means that neither the industry nor regulators have found the silver bullet yet.
It is with no doubt that more data and reporting are necessary for sustainable investment. It is, however, safe to say that they are not sufficient to increase sustainable investment. Take, for instance, losing weight. Showing how many calories, fat, salt and carbohydrates each item of food has will not be enough to lose weight.
While people must know what they are eating, to lose weight, they need to actively choose to act upon that information. To do so, they probably need something that will make it easier for them. As Richard Thaler, the renowned behavioural economist, once said: “If you want people to do something, make it easy”.
Therefore, disclosure alone is not enough. Incentives, too, need to come in. More action is required to make sustainable investment an attractive proposition.
The market needs industrial policies that will ensure that investments required for a sustainable economy make for a good investment proposition.
By that, I mean not only the already sustainable activities but also those that need to transition from unsustainable to sustainable.
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