The study was carried out by the Forum for Sustainable Finance
As has been the practice in recent years, the debate on the ecological transition has also become the subject of polarization and conflict between two sides. Sustainable finance falls into this area, an important asset for the transition, but the subject of various prejudices from skeptics.
A working group of the Forum for Sustainable Finance has drawn up a paper to demonstrate the groundlessness of ten arguments used by detractors of ESG investments: “Sustainable finance beyond prejudices”, also aimed at making sustainable finance a driver of economic, social and environmental progress.
“It was foreseeable that with the growth of assets managed with ESG criteria and the strengthening of the European institutional positioning of sustainable finance, criticism would be raised by those who have an interest in slowing down the just transition process”, commented Francesco Bicciato, General Director of the Forum for Sustainable Finance.
In the United States, skepticism has sparked accusations ranging from deception and ineffectiveness to a secret agenda to impose on capitalism and society so-called “woke value” (a slang term for progressive activism based on beliefs about systemic injustices in the United States).
“The Forum – continues Bicciato – responds rigorously and following science-based principles, with an approach free from any ideological position and adopting, as always, a constructive and non-destructive attitude, to protect investors involved in financial support for sustainable development” .
The prejudice par excellence is that sustainable finance only serves to circulate more money in the world of finance, providing higher commissions than ordinary ones.
The paper “Sustainable finance beyond prejudices” starts from this point, demonstrating that sustainable finance:
– it does not have higher costs, on the contrary, on average commissions are lower in Sri products compared to their traditional counterparts;
– guarantees better performance in the medium-long term compared to traditional funds.
The paper then deals with the risks considered by many to be higher for sustainable investments. According to the paper, in reality “the ESG analysis underlying these products allows us to identify otherwise underestimated threats, thus allowing us to mitigate them and instead capitalize on the opportunities deriving from sustainable and responsible practices”. A position also shared by Jon Hale, director of sustainability research at Morningstar Sustainalytics in America: “Sustainable investing and attention to environmental, social and governance factors have become central to investing in recent years. Rapid growth was spurred by need for investors to consider non-financial risks posed by issues ranging from climate change to natural resource depletion, worker conditions throughout the supply chain, business ethics and wealth disparities.”
A concern, that of investment risk, which also passes through the role of the States, which should not be considered simple regulators of the financial sector, but real protagonists: “When a government undertakes to align its public policies with certain sustainability objectives, for example by adhering to the Paris Agreement – explains the paper – explicitly positions itself as a key player in the financial sector. Indeed, the commitment to fighting climate change requires that a government is not just a regulator, but that it is an active participant in financial matters. In Europe, this perspective has been welcomed not only with the establishment of defined and pre-established objectives, but also through the approval of legislation in support of such efforts”.
This does not mean, however, that there are only lights and no shadows. Despite recent European regulations aimed at improving the transparency and quantity of information available, “challenges still remain, including insufficient data standardization, data gaps, difficulties in understanding the importance of ESG issues and potential labeling and rating issueswhich give rise to greenwashing practices.
The fight against greenwashing
In order to avoid greenwashing practices, the paper identifies two paths:
– Greater standardization of rules and criteria for assessing ESG risks;
– strengthening and consolidating the rules to make controls more effective.
It must then be underlined that the uncertainty about the rules gives space to another negative phenomenon for the ecological transition: green hushing, little known but very frequent among Italian companies.
Green hushing consists of not communicating or communicating in a restricted way one’s initiatives and objectives regarding environmental sustainability, often for fear of being criticized or accused of greenwashing.
Among the causes also theuncertainty about the effectiveness and measurability of one’s environmental policies; the lack of awareness or importance attributed to the issue of sustainability, considered as a cost and not as an investment and the desire to maintain a competitive advantage over competitors, avoiding revealing one’s strategies and results.
The Forum’s working group emphasizes that, to avoid such misleading practices, it is still necessary to “make standardization and consolidation efforts to simplify the collection, reporting and analysis of ESG data”.
Dialogue between companies and shareholders
Moving on to the relationship between companies, issuing companies and shareholders, the paper argues that the company’s vote, i.e. the right of shareholders to express their preferences on the strategic decisions of the companies in which they invest, has an impact on the policies of the issuers, i.e. those companies that issue financial securities. Voting, the Forum for Sustainable Finance further explains, is an important tool for influencing the governance of companies and for promoting the creation of long-term sustainable value and therefore economic, social and environmental benefits for investors and the community.
The paper “Sustainable finance beyond prejudices” then recognizes the importance of engagement, that is, the dialogue between investor and issuer on sustainability issues, such as respect for the environment, human rights, ethical standards and good corporate governance practices. The editors explain that engagement is a long-term process, which aims to improve the behavior of the issuer and make it more transparent, i.e. to provide clear and complete information on its activities and performance.
2024 is the year in which the CSRD Directive on sustainability reporting comes into force, a watershed on the subject. With reference to the regulations issued in Europe on the subject of sustainable finance, the paper argues that these regulations increasingly penalize those who decide to externalize coststhat is, to ignore or hide the negative impacts of their activities, and instead incentivize those subjects who adopt responsible and transparent practices.
In short, for the Forum, it is precisely sustainable finance that allows us to unmask any deceptive practices because it brings to light the costs that companies decide to outsource to guarantee better profitability results in the short term, while exposing themselves to the risk of leading to negative impacts on the environment, society or other stakeholders. “By highlighting the source of these costs, (sustainable finance) allows investors to make informed decisions about their investment choices,” the report writes.
This is the case of a company that decides to have another company produce a product with a large environmental impact, so as not to place the responsibility on itself. The rules of sustainable finance, however, by investigating commercial relationships and practices, as well as intra-company relationships, reveal these dynamics and protect investors.
For 2024, global green, social, sustainability and sustainability-related bond (GSSB) issuance is expected to continue to grow, with the focus on green bond issuance. This growth will occur in a challenging environment for borrowers across all asset classes, characterized by tighter financing conditions and weaker economic conditions.
Despite the challenges, the growing urgency around decarbonizing the economy could push the Gsssb market towards a trillion dollars. Despite the skeptics.