Increased scrutiny will make greenwashing tougher

The global conversation around climate and social issues will make engaging in greenwashing more difficult, says Jacob Hegge, an investment specialist with J.P. Morgan Asset Management.

Hegge said the growing popularity of bonds that focus on environment, social and governance (ESG) excellence is helping to identify bad-faith players who try to appear more conscientious than they are.

He allowed that investing in green initiatives can be confusing, given unclear and sometimes conflicting definitions, but standardization is coming.

“It’s great to see all the activity around ESG, but a consequence of this increased activity means a greater dispersion in terminology,” he said. “As ESG investing continues to grow, we’d expect to see more standardization. But until then, it’s important to understand that navigating the landscape can be difficult.”

Hegge said investors should test the terminology used to define green projects.

“Is the data or testing methodology readily available for investors to use? Is it easy to understand? Are the definitions explained and easily accessible? These are things investors need to be looking out for,” he said. “It comes down to transparency and consistency. And as ESG investing continues to grow globally, we expect this standardization to be more prominent in the market.”

The hot ESG market makes it all the more necessary for investors to know what they’re buying, Hegge said. “We do think it’s important for investors to look under the hood and pay attention to what investment firms are saying when they title a fund as being ESG. They really need to make sure that investment products are staying true to the prospectus.”

Hegge said green and sustainability-linked bonds are being issued at record levels, and issues are likely to increase.

“This year alone, green social sustainability and sustainability-linked bonds are expected to reach a combined issuance of over a trillion [U.S. dollars], which is doubled compared to last year,” he said. “And … some expect that investment in green bonds will actually double and reach US$1 trillion for the first time in a single year by the end of next year.”

Hegge said many companies are at the beginning of their green journeys, and their success in meeting ambitious targets will reflect their commitment level.

“Don’t narrow your opportunity set by being put off by low ESG scores. The important part is whether these scores are improving over time. You can find sustainable bonds even if they don’t have a sustainable label in the market,” he said.

“The global fixed-income market is very large and there are a lot of opportunities out there.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.