Investors and Academics Join Forces Against Greenwashing

    Stockholm (NordSIP) – On June 30, 2022 NordSIP reported on Eurosif’s concerns regarding the confusion generated by Financial Market Participants (FMPs) tending to use the Sustainable Finance Disclosure Regulation (SFDR) reporting framework as a de facto fund labelling system.  In true “bring me solutions, not problems” style, the partnership of Europe-based national Sustainable Investment Forums has now released a proposed classification scheme for sustainable investments.  Published on July 12, 2022, the white paper is the fruit of a collaboration between Eurosif and its members together with the University of Hamburg.

    Eurosif acknowledges the important role played by the SFDR and Markets in Financial Instruments Directive (MiFID II) in helping to increase transparency and directing capital away from harmful investments.  However, it argues that these regulations are based on a definition of sustainable investments that is too broad and neglects the concept of investors pushing companies to transition towards increased sustainability via engagement activities.  The white paper seeks to describe the different sustainable investment strategies available in the market in a logical way, while introducing the missing transition-focused elements.  Eurosif also points out that the paper is intended as a basis for discussion rather than a definitive solution.

    The first level of thinking behind the proposed classification is the evaluation of an investment’s ambition level towards transition facilitation and positive impact.  This is then combined with an assessment of the investment’s objective.  Is it the adherence to specific values or norms, better risk/return, or a tangible contribution towards sustainability targets such as the Sustainable Development Goals (SDGs)?  The assessment takes into account both financial and impact materiality.  The white paper also distinguishes between pre- and post-investment strategies.  The former include portfolio management techniques such as exclusions, norms-based screening, ESG integration, best-in-class/progress and the use of sustainability themes.  The latter refer to active engagement with investee companies and targeted voting practices.  Using this methodology, Eurosif and its University of Hamburg colleagues created a classification scheme based on five categories:

    1. Exclusions-focused investments
    2. Basic ESG investments
    3. Advanced ESG investments
    4. Impact-aligned investments
    5. Impact-generating investments.

    Each of these is then mapped against the defined pre- and post-investment practices, and minimum performance measurement and documentation requirements are suggested.  Within the various impact measurement approaches available to investors, the paper focuses on the Impact Management Platform (IMP, formerly the Impact Management Project) and the European Union Platform on Sustainable Finance (PSF) on the basis that these are broadly backed at supranational level by the likes of the Organisation for Economic Co-operation and Development (OECD), the International Finance Corporation (IFC), the World Bank, the United Nations Environmental Program Finance Initiative (UNEP FI) and others.

    Importantly, Eurosif does not seek to supersede previous or ongoing initiatives such as the SFDR, EU taxonomy or MiFID II, but rather to inject some market-based order into the classification efforts and introduce the missing elements of transition contribution and investor impact.  Many of the concepts presented will be quite familiar to NordSIP’s ESG-literate readership.   Nevertheless, the white paper is a well-structured, logically presented piece of work and as such definitely recommended reading.  Moreover, Eurosif is now inviting further discussion and input from market players on the design of a detailed assessment system to determine how investments will qualify for each category.  If policymakers and FMPs can agree on a solid, all-encompassing classification scheme alongside a robust reporting and verification framework, we will have taken a huge step towards finally eradicating greenwashing.

    Image courtesy of Universität Hamburg
    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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