Citywealth speaks to Petra Posnikova, Investment Director at multi-family office, VAR Capital, to discuss ESG investments, define greenwashing and reveal possible reputational threats hidden behind new ESG offerings.
ESG is in constant evolution, but new ESG offerings may reveal hidden issues and reputational threats for individuals as well as firms. Problems around ESG can be connected to what has been called 'greenwashing', defined as a marketing strategy which tries to convince the public that a specific company adopts environmentally friendly choices.
Citywealth interviewed Petra Posnikova, Investment Director at multi-family office, VAR Capital, to discuss ESG investments, define greenwashing and reveal possible reputational threats hidden behind new ESG solutions.
What ESG programmes are delivering results?
There are different ways to get involved in ESG or sustainable investing and each investor has to be clear on what results they would like to achieve and what exactly sustainability means to them. For example, some investors are more focused on financial results and, therefore, broader ESG funds or ETFs with a history of delivering in line market returns – sometimes with lower levels of risk – may be appropriate. If social impact is the key goal and returns are secondary, investing in smaller projects, often in private markets, could be a good alternative. It may also be that investors take an issue-based approach and so would see best results from funds or ETFs with a clearly defined focus, such as clean and renewable energy, or electric vehicles.
Could you give us concrete examples on how ESG investments deliver social impact?
It’s a good question as it seems that some companies embrace ESG as more of a “box-ticking exercise” and it can be difficult to see the benefit of that. However, even some basic efforts can ultimately do good and be the start of a positive trend. While it’s not enough to simply improve disclosures, release a sustainability report or hold a sustainability focused investor event, many other activities do have potential to benefit employees, customers, shareholders and even support operational performance. Any improvement on issues ranging from greenhouse gas emissions, water usage, safety at work, to employee wellbeing and stakeholder engagement can ultimately be making an impact. And the payoff for companies to engage in ESG efforts is quite clear – investors often prefer allocating their money with ESG leaders, who can then reduce their cost of capital and attract better valuations as well as maintain better relationships with shareholders.
How does ‘greenwashing’ impact ESG investments?
Greenwashing is often defined as a tactic of conveying a false impression or providing misleading information about how a specific company's products are more environmentally or socially responsible. Greenwashing affects how individuals and investors can engage with the sustainability movement, often hindering any progress made. When there is a constant stream of misleading information, trust in sustainability claims as a whole decreases. This can make it more challenging to differentiate between a greenwashed company from an actual green company. Also, given the recent outflows from ESG funds in Q1 2022 and the last couple of months, “greenwashing” may be one of the reasons why some of the ESG funds get punished and it is, therefore, an issue which should urgently be addressed.
New programmes are revealing issues in ESG offerings. What reputational problems do you envisage for the industry?
Issues in the ESG world have been a growing concern, escalating with scandals around greenwashing probes at Deutsche Bank’s fund arm DWS Group, and Goldman Sachs Asset Management more recently. Misleading information and false claims can not only lead to unintentional damage to the environment, but also severely hinder a company’s reputation and trust from the public. Investors have been demanding more clarity on the nature of their ESG and “sustainable” investments, fund methodologies and credentials, and regulators are locking down on any misleading practices through frameworks such as the Green Taxonomy Framework, leading to better protection of individuals and investors.
What are the best ESG funds available at the moment and why? What are they investing in?
In an increasingly complex investment landscape, our approach captures sources for growth through long-lasting and sustainable trends, providing an alternative to traditional strategies. We, therefore, tend not to invest in actively managed funds and focus on single line bonds and equities, but when we want to express a specific thematic view, we would make use of ETFs. In this case, there are a few interesting ETFs focused on tackling specific issues in the sustainability space, which have also been significantly outperforming the market this year and also longer term. An example would be the iShares Global Clean Energy ETF investing in renewable energy companies, or the Global X Lithium & Battery ETF investing in the largest and most liquid companies active in exploration and mining of lithium or production of lithium batteries, which as we know, are vital for powering everything from mobile phone to electric vehicles and drones.