What if we could change the world?

Through their investments, investors can help to heal the planet. That is the idea behind "responsible investing". Despite a slowdown in 2022 and 2023, responsible investments are expected to recover quickly and grow up to $200 trillion by 2030, four times their total current value. Mirage or miracle? Sustainable finance rouses intense debate. But it is better than simply standing idly by.

By Bertrand Beauté

People around a tree in the shape of a planet

"We’re all consumers. When we go to the supermarket and buy plastic products, we know that what we’re doing is bad for the planet. The same goes for investing. We have the option of choosing sustainable products, or not." Luke Ward, investment manager with the Global Discovery Team at Baillie Gifford, is convinced that investors have a key role to play in building a better world.

And that’s perfect timing, because sustainability is in vogue. The 2020 investment review from the Global Sustainable Investment Alliance (GSIA) reported that sustainable investments totalled $35 trillion that year, showing 15% growth from 2018, and almost 36% of all assets under management were labelled as sustainable. "After strong growth until 2021, sustainable finance has been on the decline for the past two years," says Tzoulianna Leventi, investment manager and ESG analyst at abrdn. "The war in Ukraine, soaring energy prices, inflation and rising interest rates have pushed sustainability out of the limelight."

But this backlash will probably not last. "You can’t decouple sustainability from the global economy. The geopolitical and economic situation over the last two years has directed financial flows to less sustainable industries, especially oil companies, which did extremely well in 2022," says Laura Kaliszewski, global head of Client Sustainable Investing at Natixis Investment Managers. "Yet sustainable products are desperately needed, and there’s huge demand for them. According to surveys, nine out of ten institutional investors plan to invest more sustainably in the coming years."

"Younger generations are much more sensitive to good environmental, social and governance practices when investing"

Franck Sabbah, head of AM Sales Continental Europe at Berenberg

Franck Sabbah, head of AM Sales Continental Europe at Berenberg, agrees. "The Paris Agreement in 2015 (COP21) truly sparked a shift in awareness. Governments set commitments and, industries across the board took things from there. All listed companies have now understood that ESG cannot be ignored. And the trend is likely to persist, because younger generations are much more sensitive to good environmental, social and governance practices when investing." What does that add up to? Precedence Research forecasts that the global sustainable finance market could exceed $200 trillion by 2030, four times its total current value. So does that mean everything is green in the best of all possible worlds? Unfortunately not. For its detractors, sustainable premise that we can achieve economic growth that is harmless, or even beneficial, to the environment, but there is no scientific argument for that," Guillaume Carbou told PME Magazine. A professor and researcher at University of Bordeaux, he specialises in political ecology and is co‑author of Greenwashing: manuel pour dépolluer le débat public (Greenwashing, a guide for decontaminating public debate) published by Seuil in 2022. Many researchers believe that the problem with green finance lies in the very idea of ecological growth. They feel it is an oxymoron.

To this stance, supporters of sustainable finance snap back: "pragmatism". "Radicals think we should bring everything to a halt. But the world is not going to stop. The reality is that people consume, and we need mines and energy to satisfy them," retorts Franck Sabbah. "So the question is, how do we improve the situation? Of course, it’s not perfect, but we have to be pragmatic and try to improve current technologies." However, despite the popularity of responsible investing in the financial community, environmental damage continues unabated, as highlighted in our May 2023 issue on plastics. Plus, greenhouse gas emissions have hit record levels, growing 0.9% between 2021 and 2022 to 36.8 gigatonnes of CO₂ equivalent, as reported by the International Energy Agency (IEA). "We still see emissions growing from fossil fuels, hindering efforts to meet the world’s climate targets," Fatih Birol, executive director of the IEA, said. "International and national fossil fuel companies are making record revenues and need to take their share of responsibility."

That is for those who see the glass as half empty. For those who see it as half full, "an additional 550 million tonnes of emissions were avoided by increased deployment of clean energy technologies in 2022," the IEA estimated in its report. "The impacts of the energy crisis didn’t result in the major increase in global emissions that was initially feared – and this is thanks to the outstanding growth of renewables, EVs, heat pumps and energy efficient technologies," IEA Executive Director Fatih Birol said. "Without clean energy, the growth in CO₂ emissions would have been nearly three times as high."

"We’re not doing enough to limit global warming," Laura Kaliszewski concedes. "If we continue without changing anything, we will not achieve the United Nations Sustainable Development Goals. An unprecedented acceleration is necessary and this requires close collaboration between all stakeholders. Governments must lead the transition, providing clarity and strong incentives. Companies must develop alternative solutions. And the financial sector has a key role to play in financing these solutions and supporting the transition to a more sustainable world. Faced with the climate emergency, investors are there, ready to invest."

But how do you choose truly responsible investments, without being deceived by marketing tactics and greenwashing? "It’s easy to say that you’re protecting the environment or acting sustainably. But it’s harder to actually do it," Tzoulianna Leventi says with a smile. Companies have given us plenty of broken promises. Coca‑Cola is the classic example. Back in 2008, the American multinational claimed that it would include 25% recycled PET in its bottles by 2015. Unfortunately, according to the company’s lengthy, 88‑page Business & Sustainability Report, this percentage ended up being only 15% in 2022. But that has not stopped Coca‑Cola from making even stronger claims. In January 2018, the company announced its World Without Waste plan for 2030. By this timeline, all Coca‑Cola packaging worldwide will have to contain 50% recycled material.

And that is just one example. Countless companies, ETFs and other sustainable funds have been accused of greenwashing or failing to adhere to their social and governance commitments. But pressure from the media and the courts has begun to effect change. For example, on 26 September, the asset manager DWS received the largest ever fine handed down in the United States for greenwashing. The Deutsche Bank subsidiary agreed to pay $19 million for issuing misleading statements about how it incorporated environmental, social and governance issues into its investment processes. Another instance took place in the United Kingdom in 2022. The bank HSBC was banned from using poster ads promoting its green credentials, which were deemed "misleading" for omitting material information about its own action.

"The greenwashing scandals have raised awareness in the financial and business communities," Franck Sabbah says. "Everyone now knows that if the gap between marketing claims and reality is too wide, the consequences can be severe and, in some cases, severely impact the reputation of companies."

THE DARK EMPIRE STRIKES BACK

In December 2022, the asset management giant Vanguard sent a chill throughout the sustainable finance community. The world’s second largest asset manager, with $8.2 trillion in assets under management, announced that it would withdraw from the Net Zero Asset Managers initiative, after joining in 2021. This group is the largest alliance of international asset managers committed to supporting more sustainable finance. Not to be taken lightly, this departure depicts the rise of an "anti‑woke" movement of defiance against ESG investing in the United States. In May 2023, the Republican governor of Florida, Ron DeSantis – a potential candidate for the White House in 2024 – passed a bill prohibiting state officials from investing public funds to promote environmental, social and governance goals and banning ESG bond sales. The same DeSantis had decided in December 2022 to pull $2 billion in public funding invested with BlackRock, due to the asset manager’s pro‑ESG stance. Gloomier still, US shareholders seem to be heading in the same direction. Between January and August 2023, the Sustainable Investment Institute reports that proposals submitted at general meetings calling for more climate action were approved by an average of 23% of shareholders, versus 34% in 2021 and 30% last year. A case in point, one‑third of Amazon shareholders at this year’s AGM approved a resolution that would require the online retail giant to address the environmental risks associated with its plastic packaging, compared with nearly 50% last year, and 35% in 2021. But experts are not worried about these headwinds. "The boycotts launched in some Republican states will not change anything," says a specialist in the sector. "The sustainable finance market will continue to grow."