A recently released report commissioned by environmental activist group Greenpeace has raised doubts over the role played by so-called sustainability funds in directing capital towards a sustainable future. The study, conducted by the Swiss sustainability rating agency Inrate for Greenpeace Switzerland and Greenpeace Luxembourg, finds that sustainability funds have “barely managed to redirect more capital towards a sustainable economy than conventional funds”, that they are “not contributing to addressing the climate crisis, and misleading asset owners who want to increasingly invest their money in sustainable projects”.
While the results of the study are specific to Luxembourg and Switzerland, their relevance is far-reaching as both countries play a significant role in financial markets. Luxembourg is the largest investment fund centre in Europe and the second largest in the world, while Switzerland is one of the most important financial centres in the world in terms of wealth management, Greenpeace notes.
Inrate is an independent ESG and sustainability rating agency based in Switzerland that has been working with various players in the financial sector on environmental, social and governance (ESG) issues for over 25 years. Its clients include banks, family offices, fund providers, non-governmental organizations, pension funds, asset managers and global insurance firms.
As in other regions, the demand for ESG financial products in Asia has rapidly increased over the past few years and continues to grow.
But are sustainable investment funds, which are attracting significant inflows of capital, able to genuinely invest in projects that have a positive and tangible effect on the environment and society?
Among the study’s key findings is that sustainable investment funds have a higher ESG impact score than conventional funds. However, the difference is so small that it hardly leads to a better rating.
With the exception of the production of cement and the defence industry, there was no significant reduction when comparing conventional and sustainability funds in terms of involvement in other critical activities.
Commenting on the findings, Martina Holbach, climate and finance campaigner at Greenpeace Luxembourg, says: “The sustainability funds in this report fail to funnel more capital into sustainable companies or activities than conventional funds. By calling themselves ‘ESG’ or ‘green’ or ‘sustainable’, they are misleading asset owners who want their investments to have a positive effect on the environment.”
On the plus side, however, the sustainable investment funds analyzed were less involved in environmental controversies such as deforestation or oil spills.
While the European Union has implemented major legislative changes related to sustainable finance, this new regulatory framework still presents gaps and limitations.
Greenpeace says the promotion of sustainable investment products must lead to lower emissions in the real economy and is calling on decision-makers to strengthen the regulations even tighter to promote what it calls “true sustainability” in the financial markets.
This must include comprehensive requirements for sustainable investment funds, and as a minimum allowing them to invest only in economic activities whose emissions reduction path is compatible with the climate targets of the Paris Agreement.
Most sustainability funds implicitly or explicitly indicate improved portfolio impacts. Not fulfilling this promise could produce reputational and legal risks due to greenwashing, diluting client trust, the group says.
For the financial sector, therefore, setting high standards for sustainable investment rules, as well as impact-related controlling and reporting, is crucial.
“There are no minimum requirements or industry standards against which to measure the sustainability performance of a fund,” says Jennifer Morgan, executive director of Greenpeace International. “Self-regulation by financial actors has proven to be ineffective, allowing banks and asset managers to greenwash in broad daylight. The finance sector must be regulated properly by lawmakers, no ifs, no buts.”