What does the recent decline in ESG investment inflows mean for the future of sustainable investing?

Will greenwashing halt the maturity of sustainable investing?

While there have been a number of factors that have led to a reduction in inflows, alongside a global downturn in investment markets, greenwashing is often seen as the bigger, longer-term issue. 

A lack of standardisation across sustainable funds has exacerbated the matter which, up until now, has been considered a marketing issue. However, recently this has spilled across to being a legal problem as regulators’ concerns have led to action by some authorities. 

In November 2022, Goldman Sachs agreed to pay a $4 million penalty to settle charges brought by the US Securities and Exchange Commission (SEC) for policy and procedural failures in its ESG research. Early in 2023, German police raided the offices of fund manager DWS, a subsidiary of Deutsche Bank, investigating possible prospectus fraud after claims by a whistle-blower that it had flaws in its ESG strategy. The industry is poised for which asset manager will be next, potentially increasing any distrust.

What’s being done to solve the issues?

Regulators are catching up. Over the last few years, the EU has introduced Taxonomy Regulation establishing conditions that must be met for economic activity to qualify as environmentally sustainable and Sustainable Finance Disclosure Regulation (SFDR) that enforces ESG disclosures on asset managers. In the UK, over the next year the FCA is bringing in Sustainability Disclosure Requirements, investment labelling and anti-greenwashing rules. These will protect the use of certain sustainability-related terms and improve reporting with the intention of preventing misleading marketing and enhancing consumer disclosures.

A poor year may end up being a positive for sustainable investing

ESG focused performance may have been unflattering and inflows reduced over 2022, but many positives could come out of this period for the future of sustainable investing.

Clear light is being shed on the differences in ESG implementation and asset managers keen to label funds as ESG, green, or impact, are being held more accountable for their claims. With authorities now willing to act, more transparency, clear distinction between products and better standards are likely to be the outcome. Ultimately this is all to the benefit of investors who will be able to have more confidence in the alignment of their assets with their sustainable objectives.

What is often forgotten, and is what those politicising sustainable investing in the US are perhaps missing, is that ESG investing is not just about improving the environmental credentials of investments, it’s about risk. While in years like 2022, there may be a quick buck to be made from oil and gas, analysis of the environmental, social and governance risk of the companies you invest in, may well just provide you with an improved long-term outcome.

What should you do?

If you’re keen to invest sustainably, it’s essential you conduct appropriate research, and engage an investment manager that fully understands your requirements and is committed to managing a portfolio of sustainable investments rather than playing lip service. Choosing a portfolio that is diversified and truly sustainable should give positive returns for the wallet and soul over the long-term.