ImpactAlpha, July 20 – The top line numbers from the Global Sustainable Investment Alliance’s biennial review back the now-conventional wisdom that interest is surging in environmental, social and governance, or ESG investing. Sustainable investing grew to $35 trillion globally by early 2020, a 15% increase from 2018, and now make up 36% of all professionally managed assets, the alliance reports.
Dig deeper and it’s clear that methodological issues make comparisons, and even the totals, suspect.
What to make, for example, of the review’s finding that global ‘impact investing’ – a tiny but more rigorous subset of the broader ‘sustainable investing’ – fell by 26%, to $444 billion, even before the pandemic, and that U.S. impact assets dropped even more steeply to $212 billion? Or that $2 trillion in sustainable investments vanished in Europe?
The drops should be taken with a large grain of salt (ideally on the rim of a margarita) and may actually reflect progress, not decline. The alliance attributed the 13% drop in sustainable investment in Europe to legislation meant to flush out greenwashing. “Not all products or strategies considered in the past would meet these new regulatory definitions,” the alliance says.
The Sustainable Finance Disclosure Regulation, or SFDR, requires investors, asset managers and advisors to classify their products and explain their approaches. The U.S. Securities and Exchange Commission has formed a climate and ESG taskforce to mull similar regulations.
The lack of standard definitions and disclosure metrics has opened the way for greenwashing and “risks derailing hard-won progress,” warns Generation Investment’s Al Gore.
The review acknowledges that comparisons with previous totals can be misleading. The alliance’s member organizations in the U.S., Europe, Japan, Canada and Australasia sized their sustainable investment markets using different methodologies, which in some cases differed from prior years.
To reach its impact investment estimates, for example, alliance member US SIF extrapolated from a subset of more than 1,800 financial firms identified in its 2020 trends report; it used a different subset for its 2018 estimate. And both are different from a separate tally by the Global Impact Investing Network, which changed its methodology and used extrapolations to show an increase in impact investments in 2019.
A more fundamental flaw may be the Global Sustainable Investment Alliance’s broadly inclusive view of sustainable investing. The review’s most dilute categories, ESG integration and negative screening, together make up roughly two-thirds of the tally’s total. Sustainability-themed investing, positive “best-in-class” screening and impact and community investments represent a small portion of investments.
An observation in GSIA’s foreword is spot-on, however. “This year’s report highlights an industry that is in transition, with rapid developments across regions that are resetting expectations of sustainable investment, with an emphasis on moving the industry towards best standards of practice.”