Bridging the Gap Between Green Investment & Greenwashing

Summary:

• Governments are aligning with globally to set the decarbonization goals

• BlackRock requires public companies to follow its Investment Stewardship

• ESG investment market is growing rapidly and so the issue of greenwashing

• Existing ESG frameworks are fragmented and there is currently no single universally applicable standard to evaluate green investment

• SEC’s proposal would be a game-changer to the ESG investment field

• Due diligence with data analytics for bridging the gap between green investment and decision-making

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We Got the Green Light

As climate change becomes ever more prominent, governments and the masses are starting to account for their contributions to climate change. Never has the word “green” resounded so loudly, and the ever-greater push for ESG by governments globally is gaining traction.

Counties such as U.S, Japan, EU and even a small country like Singapore are doing their collective part in setting precedence for regulations to achieve net-zero emission and decarbonisation goals.

Climate-related policies and investments are no longer ideological disputes amongst governments, environmentalists and big corporations. It is official policies and legit businesses that governments and multi-billion corporations are trying to tackle in an effort to create sustainable economy.

Green economy will be the core consideration of government policies, corporate strategies and will bring new opportunities for investments.

BlackRock Dropped the Hammer

Governments are individually taking action to curb the emissions within their borders to align themselves with the goals set in the Kyoto protocol.

For instance, Singapore government has started to act on their goal of achieving net-zero emissions by mid-century through a series of policies listed in the SG Green Plan 2030. The spearhead of the plan being SG green bond issuance estimated to value at $35 billion through 2030 to aid green and sustainable projects to be funded and completed.

Beyond governments, institutions are also playing a critical role. The largest asset manager BlackRock is seeking to actively engage with companies regarding their climate and social impact on the world through their guidelines set in the BlackRock Investment Stewardship. BlackRock CEO Larry Fink has created an echo chamber of the importance of complying with ESG protocol. The strong push by BlackRock on public companies has started the cogs and gears in motion, and we are now seeing an increasing number of compliance and disclosure of ESG information to investors and the public.

The rapid pace of climate change is now changing the arena of investing. What used to be for branding is now of key financial strategic importance for public corporations. ESG disclosure is no longer just a façade for the public, but of paramount importance to investors and asset managers to juice their big returns.

Money Follows ESG

The ESG market has been gaining traction over the past few years and is estimated to hit USD $53 trillion by 2025. Even the annual amount privately raised by climate and sustainability start-ups are valued at $45 billion in 2021, a figure that will continue to get bigger as the push for sustainability becomes stronger. Estimates have also reiterated the growing market size of green bonds, where the total valuation of $297 billion is expected to hit record $1 trillion by the end of 2022.

The prevalence of the growing market has gotten financial institutions to band together to form Glasgow Financial Alliance for Net Zero (GFANZ) which aims to accelerate decarbonization and to achieve net-zero targets. GFANZ consist of 450 member firms from 45 countries and represent around 40% of global private financial assets, which is estimated to be valued at $130 trillion!

With so much money in the system, there will always be black sheep lurking, waiting to extort the system. The collective voices of investors have been echoing the questionable legitimacy of “ESG certifications” and lack of transparency. The lack of a systematic check and due diligence has given rise to what is known as “greenwashing”.

Greenwashing Machine is Whirling

Look around the market and you will see that many corporations are selling their products and marketing as “ESG” without any quantitative nor qualitative evidence. The lack of full disclosure of climate-related data and financial figure prevents any checking by investors and the public on the legitimacy of the company – this has been dubbed “greenwashing”.

As the size of the market continues to grow and accelerate, the more outliers and exploiters there are who try to get a piece of the pie. These unscrupulous individuals and businesses frame themselves with a beautiful image and seem perfect.

Yet, all they are is just but an empty vessel. This is not new, as we have seen history repeating itself over and over, from the subprime mortgage to the recent crypto scam. The ESG finance market is no exception and could potentially become one.

There have been multiple claims by asset managers and companies trying to purport how something remote can be within an “ESG business”, misleading investors and the public in the process. There are also multiple advertisements and videos being uploaded by companies to portray progress in the field of ESG, only to be shamed by the public.

One recent instance in 2020 was how Nikola was forced to admit their hydrogen fuelled lorry in their advertisement video was not moving through its own engine but was rolling down a hill. Fortunately, this time, authorities and law enforcement are quick to crack down on these misrepresentative claims before any massive escalation.

One such example is how Deutsche Bank’s subsidiary DWS was investigated by German law enforcement for greenwashing claims. The U.S. SEC also cracked down on Goldman Sachs for greenwashing. More recently in May 2022, BNY Mellon Investment adviser was charged with $1.5 million for greenwashing ESG fund. All these arbitrary “ESG” labelling has no substantial evidence, making screening and due diligence tough.

All these incidents have a common root cause – the lack of a uniform ESG framework that companies must complied to. The ambiguity has led to many trying to arbitrage the situation and companies finding loopholes to slip through.

Fragmented ESG Frameworks

The lack of a universally recognised and standard disclosure framework is one of the main reasons why greenwashing is still a conundrum.

Unlike accounting standards, which takes alignment to IFRS, ESG disclosure does not have a globally comparable standard to promote transparency, accountability, and efficiency.

There are multiple standards that a company can choose to adopt, and beyond just standards, there are also multiple reporting frameworks that can be selected (if all these sounds confusing to you, don’t worry, that is why even hedge funds find it tough to perform due diligence on “ESG certified” companies).

SEC’s Proposal: Would-Be Game Changer

Just recently, the SEC released a proposal on mandatory ESG disclosure which supports the voices of investors – the need for clarity on a company’s climate impact. This 350-page proposal came in on May 2022 and is setting precedence on regulations for companies and ETF funds. The ESG finance market has always been a can of worms, and SEC is now looking to correct the greenwashing and lack of compliance within the market.

In a short summary, the proposal by SEC Chairman Gary Gensler requires companies to disclosure climate-related risks that are deemed to have a material impact on financial performance be it in the short or long term. ETF Funds must disclose what they consider as “ESG factor” and must disclose details about their criteria and data they use to achieve their investment goals. Finally, ESG focused funds must also disclose relevant metrics such as total greenhouse gas emission of their portfolio and the annual progress of the portfolio companies towards their ESG goals.

This proposal removes the “cherry” picking in reporting and disclosures that companies have been practising, allowing for greater transparency and consistency.

Yet, even with the intervention, there is still no single global standard that companies have to adhere to for ESG related disclosure, but a new market has been created. Now that companies and funds must follow these new disclosures, there will be a demand for ESG data analytics and reporting companies to provide services for disclosure and compliance.

Bridging the Gap

As discussed, the lack of a single global standard has led to a widening gap in what investors are expecting and what companies are disclosing. What is deemed material to investors may not necessarily material to CEOs due to how “loose” existing frameworks are.

Sustainability reports are inevitability up to each company to disclose “cherry” picked data which renders the lack of transparency and legitimacy of data. Due to the inability to check the legitimacy of data, investors are shying away from ESG related business or are taking undue risks when they choose to invest in ESG certified companies.

The “gap” in the current market is the information gap which many other data analytics company try to solve. The situation is akin to the crypto currency craze and meltdown in the past few months. The inability to perform screening on alternate coins such as Terra and Luna or the lack of data to perform due diligence on companies like 3 Arrows Capital has led to many investors losing millions, and possibly billions of their life savings. Similarly, the ESG market is now lacking disclosure and transparency of data which is a strong “push” factor. To “pull” more institutes and investors into this field, there must be a bridge built to overcome the information gap.

The current solutions available in the market are still in its infant stage but seek to address a common issue, to provide data and information needed to investors for them to make an informed decision.

REANGLE’s Solution to Greenwashing

Here in REANGLE, we aim to provide transparency into a company’s ESG disclosure through data analytics and visualisation. Through screening and investigation into a company’s disclosed statement, we seek to provide screening portfolios and due diligence service for investors and asset manager through both quantitative and qualitative analysis.

For Investors

REANGLE provides screening services on investors’ portfolio through use of data analytics and visualisation. The thorough screening of each company is further augmented by our in-house developed framework adapted from globally recognised green frameworks such as TCFD, SASB and GRI.

In alignment with the SEC proposal, we assess the financial impact, expenditure considerations and financial estimates of a company based on their disclosure for investors to ensure that the company is aligned with their ESG goals.

We also provide “ESG Risk Analysis” on scenarios, which stress tests a company’s current financial state with different potential factors and risks that the company could be exposed to in the future. The scenario-based analysis also takes into account of the different economic scales to illustrate the resilience of the company to changes in the globe.

Through this screening process REANGLE can provide due diligence for investors who are not experienced in the ESG field or have limited access to proprietary data. The key idea to the solution we are providing is targeted towards the information gap that is currently present in the market which governments and institutions are endlessly trying to solve.

For Companies

We provide financial and data analytics for green financing for green companies to better manage their key resources and achieve their net zero emission targets through our comprehensive dashboard. Companies can easily view their green KPI and keep track of their goals to better achieve their net-zero emissions and decarbonisation goals.

Beyond our dashboard, we also engage in consultancy services to aid companies who are keen on developing their sustainability strategy. Through use of data analytics tools and programming languages, we can develop machine learning models that aids companies in better forecasting their emissions and cost. This allows companies to act pre-emptively before they incur the high costs of transition at a later date.

Lastly, we also create opportunities by matchmaking businesses with asset managers and private capitalists which helps companies finance their projects. Our web application platform helps investors and asset managers seek out ESG compliant companies through by providing a “REANGLE’s A list” which includes companies that have achieved stellar disclosure and management scoring based on our rubrics. These companies will be featured on our website, allowing for match making for companies who are keen to obtain funding for their green projects.