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π Economics

Responsible investment or greenwashing: how to tell the difference?

Patricia Crifo
Patricia Crifo
Professor of Economics at École Polytechnique (IP Paris), Researcher at CREST (CNRS) and Associate Researcher at CIRANO
Key takeaways
  • Socially responsible investment (SRI) evaluates investments according to non-financial ESG criteria (environment, social, governance).
  • Impact investing adopts active strategies seeking a strong extra-financial return based on three principles: intentionality, additionality and impact measurement.
  • However, SRI and conventional portfolios tend to be very similar, and the practical impacts of SRI appear to be very limited.
  • Researchers show that SRI investors appropriate the vocabulary of impact assessment without adopting its practices, which is akin to greenwashing.
  • To be truly impactful, SRI investors must overcome many challenges and go beyond the integration of ESG criteria.

Social­ly respon­si­ble invest­ment (SRI), which was still rel­a­tive­ly unknown until the ear­ly 2000s, con­sists of tak­ing non-finan­cial cri­te­ria, such as envi­ron­men­tal, social and gov­er­nance (ESG), into account in the invest­ment eval­u­a­tion process. 

In 2021, 96% of the 250 largest multi­na­tion­al com­pa­nies on the Fortune500 list (up from 64% in 2005) have dis­closed their ESG pol­i­cy. Sim­i­lar­ly, near­ly 4,400 investors and 50 ser­vice providers, rep­re­sent­ing more than $120 tril­lion in assets, have signed a com­mit­ment to inte­grate ESG infor­ma­tion into their invest­ment deci­sions12.

Growth in the num­ber of sig­na­to­ries to the Prin­ci­ples for Respon­si­ble Invest­ment (PRI) 3.

But when it comes to defin­ing ESG stan­dards, dif­fer­ences of opin­ion abound, and crit­i­cism is rife. Elon Musk, for exam­ple, called ESG “a scam” and denounced “fake social jus­tice war­riors” after Tes­la was removed from the S&P 500 ESG index – for rea­sons relat­ed to dis­crim­i­na­tion and work­ing con­di­tions – while Exxon­Mo­bil remained in the index4. Beyond the con­tro­ver­sy, a fun­da­men­tal ques­tion about SRI and its true impact on soci­ety is emerging.

The Prin­ci­ples for Respon­si­ble Invest­ment (PRI)5 were estab­lished by the world’s lead­ing investors with the sup­port of the Unit­ed Nations Envi­ron­ment Pro­gramme Finance Ini­tia­tive (UNEP-FI) and the Unit­ed Nations Glob­al Com­pact in 2007. PRI sig­na­to­ries com­mit to the fol­low­ing principles

- Con­sid­er ESG issues in invest­ment analy­sis and deci­sion-mak­ing processes.

- Con­sid­er ESG issues in share­hold­er poli­cies and practices.

- Require investees to dis­close appro­pri­ate infor­ma­tion on ESG issues.

- Pro­mote accep­tance and imple­men­ta­tion of the Prin­ci­ples among asset man­age­ment stakeholders.

- Work togeth­er to increase effec­tive­ness in imple­ment­ing the Principles.

- Report indi­vid­u­al­ly on its activ­i­ties and progress in imple­ment­ing the Principles.

Origins and strategies of ‘ethical’ funds

There is noth­ing eth­i­cal­ly wrong with run­ning a busi­ness to make a prof­it while ensur­ing that pro­duc­tion is social­ly respon­si­ble. But impact invest­ing is about more than just ESG-based risk mit­i­ga­tion. It is about sup­port­ing com­pa­nies that are com­mit­ted to proac­tive­ly mak­ing a dif­fer­ence, and thus demon­strat­ing that you have indeed been able to make a dif­fer­ence on a num­ber of levels.

His­tor­i­cal­ly, the first “eth­i­cal” funds were born in the Unit­ed States. Based on the exclu­sion of com­pa­nies linked to the alco­hol, tobac­co, arms, pornog­ra­phy or gam­bling sec­tors, the aim was to meet the require­ments of cer­tain investors, includ­ing reli­gious organ­i­sa­tions. Pos­i­tive approach funds appeared in the 1970s in the Unit­ed States and in the 1990s in Europe: these sus­tain­abil­i­ty funds con­sid­er extra-finan­cial cri­te­ria to pro­mote long-term per­for­mance and sus­tain­able growth. More recent­ly, it is notably the Paris cli­mate agree­ment signed in 2015, the result­ing reg­u­la­tions and the aware­ness of cli­mate risk by major finan­cial play­ers that are con­tribut­ing to the devel­op­ment of SRI6.

Dif­fer­ent degrees of com­mit­ment to invest­ment7.

SRI strate­gies vary con­sid­er­ably: nor­ma­tive or sec­toral exclu­sions (com­pa­nies engaged in activ­i­ties that con­tra­dict norms or in activ­i­ties deemed harm­ful), the so-called “best-in-class” approach (invest­ment in the best-per­form­ing com­pa­nies in a giv­en sec­tor), “best-in-uni­verse” (invest­ment in the best-per­form­ing com­pa­nies regard­less of sec­tor), “best-effort” (best improve­ment in ESG prac­tices), and the­mat­ic (e.g. “renew­able energies”).

Impact invest­ment is defined by active strate­gies seek­ing a strong extra-finan­cial return based on three key prin­ci­ples: inten­tion­al­i­ty, i.e. the investor’s inten­tion­al desire to gen­er­ate a pos­i­tive social or envi­ron­men­tal impact, addi­tion­al­i­ty (the investor’s spe­cif­ic con­tri­bu­tion, finan­cial or oth­er­wise, enabling the com­pa­ny to increase its pos­i­tive impact), and impact mea­sure­ment, i.e. the eval­u­a­tion of the pos­i­tive and neg­a­tive exter­nal­i­ties of the invest­ed struc­ture8.

SRIs: greenwashing alert?

Until a few years ago, impact invest­ment funds would have been the only investors to car­ry out an impact analy­sis: this is no longer the case, as social­ly respon­si­ble investors (SRIs) now aim to demon­strate their con­crete impact.

How­ev­er, the two types of investors (SRI vs. impact) have fun­da­men­tal­ly dif­fer­ent lev­els of com­mit­ment and dif­fer­ent meth­ods of assess­ment. SRI investors typ­i­cal­ly invest in list­ed multi­na­tion­al com­pa­nies and focus their non-finan­cial efforts on the process of select­ing issuers, rather than on the results achieved through their invest­ments. For exam­ple, while an impact invest­ment fund will aim to demon­strate the car­bon reduc­tion achieved through the financ­ing of wind tur­bines, an SRI fund will cal­cu­late the car­bon ‘score’ of the com­pa­nies in its portfolio. 

Final­ly, SRI and con­ven­tion­al port­fo­lios tend to be very sim­i­lar, and the prac­ti­cal impacts of SRI seem very lim­it­ed to a grow­ing num­ber of researchers. It remains dif­fi­cult to imag­ine how an investor hold­ing a tiny per­cent­age of a large com­pa­ny’s shares could prove that their invest­ment makes a dif­fer­ence – how­ev­er well-inten­tioned. Using tra­di­tion­al impact ter­mi­nol­o­gy super­fi­cial­ly is there­fore far from help­ful to the SRI com­mu­ni­ty and may even be akin to green­wash­ing9.

In a recent study on the con­fu­sion between impact and SRI, we show that although SRI investors are appro­pri­at­ing the vocab­u­lary of impact assess­ment, they are not adopt­ing its prac­tices. How­ev­er, giv­en the mar­ket pow­er of SRI com­pared to impact invest­ing (about 40 times larg­er), the appro­pri­a­tion of impact analy­sis by SRI funds is not with­out con­se­quences: the dif­fu­sion of impact mea­sures in the SRI indus­try can either sup­port the devel­op­ment of impact invest­ing or threat­en its mean­ing and legit­i­ma­cy by con­fus­ing the two practices.

Sim­i­lar­ly, while the SRI indus­try is gen­uine­ly aim­ing to com­bat green­wash­ing, the moti­va­tions of invest­ment man­agers vary, with dif­fer­ent lev­els of com­mit­ment to the soci­etal dimen­sion of impact. SRI investors there­fore face many chal­lenges in mov­ing beyond ESG inte­gra­tion to true impact. ESG inte­gra­tion seeks to mea­sure the impact of var­i­ous fac­tors on a com­pa­ny’s finan­cial flows: the mate­ri­al­i­ty of a fac­tor is there­fore trans­lat­ed into a vari­a­tion in the com­pa­ny’s turnover, expens­es, or invest­ments. In con­trast, impact invest­ing, and more gen­er­al­ly impact mea­sure­ment, seeks to mea­sure the impact of the com­pa­ny’s activ­i­ties on ESG issues, inde­pen­dent­ly of the finan­cial mate­ri­al­i­ty for the company.

1KPMG (2022) Big shifts, small steps. Sur­vey of sus­tain­abil­i­ty report­ing 2022.
2PRI (2022) PRI Annu­al Report. https://​www​.unpri​.org/​a​n​n​u​a​l​-​r​e​p​o​r​t​-2022
4Elon Musk on Twit­ter: « Exxon is rat­ed top ten best in world for envi­ron­ment, social & gov­er­nance (ESG) by S&P 500, while Tes­la did­n’t make the list! ESG is a scam. It has been weaponized by pho­ny social jus­tice war­riors. » Source : https://​twit​ter​.com/​e​l​o​n​m​u​s​k​/​s​t​a​t​u​s​/​1​5​2​6​9​5​8​1​1​0​0​2​3​2​45829
5Source: https://​www​.unpri​.org/​d​o​w​n​l​o​a​d​?​a​c​=​10965
6Arjal­iès, Diane-Lau­re, Bouchet, Vin­cent, Cri­fo, Patri­cia & Mot­tis, Nico­las, « La mesure d’im­pact et l’In­vestisse­ment Sociale­ment Respon­s­able (ISR) : Un tour d’hori­zon », in Tcho­touri­an E., Bres L. and Geel­hand de Merx­em L. (Eds.), Zone fron­tières et entre­prise sociale­ment respon­s­able – Per­spec­tive mul­ti­ple: droit, admin­is­tra­tion et éthique, Edi­tions Yvon Blais (Cana­da), 2020, disponible sur le SSRN : https://​ssrn​.com/​a​b​s​t​r​a​c​t​=​3​7​33755
8FIR & France Invest (2020). Investisse­ment à impact. Une déf­i­ni­tion exigeante pour le coté et le non coté. https://​www​.le​-frenchim​pact​.fr/​w​p​-​c​o​n​t​e​n​t​/​u​p​l​o​a​d​s​/​C​a​h​i​e​r​-​I​m​p​a​c​t​-​F​I​R​-​F​r​a​n​c​e​-​I​n​v​e​s​t​_​m​a​r​s​-​2​0​2​1.pdf
9Arjal­iès, Diane-Lau­re, Chol­let, Pierre, Cri­fo, Patri­cia & Mot­tis, Nico­las, “The Moti­va­tions and Prac­tices of Impact Assess­ment in Social­ly Respon­si­ble Invest­ing: The French Case and its Impli­ca­tions for the Account­ing and Impact Invest­ing Com­mu­ni­ties, Social and Envi­ron­men­tal Account­abil­i­ty” Jour­nal, DOI: 10.1080/0969160X.2022.2032239, 2022

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