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Promoting sustainable investments

By The Ky

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Environmental, Social, and Governance (ESG) practices have become a crucial avenue for businesses to enhance their profitability, reputation, and competitiveness. ESG investments have taken center stage in this pursuit. However, the issue of “greenwashing,” or the deceptive use of green initiatives, has emerged, creating conflicts of interest and ultimately leading to greater disappointment. In a conversation with The Saigon Times, Dr. Seng Kiong Kok, head of Department – Undergraduate Business Programs at RMIT University Vietnam, provides insights into this pressing issue.

The Saigon Times: Could you explain the concept of ESG investment?

Dr. Seng Kiong Kok: ESG investment can be divided into two primary focuses. Firstly, it involves investments made by firms to advance sustainability objectives. This includes investments in information and infrastructure to facilitate accurate ESG disclosure reports, as well as measures that incorporate sustainability dimensions into various aspects of business value chains. Secondly, ESG investment entails using a company’s sustainability credentials as an indicator for investment decisions. This approach is often grounded in portfolio construction literature, where investors create portfolios based on ESG or sustainability criteria. For example, ESG metrics can guide the process, allowing investors to build portfolios aligned with high ESG or low ESG preferences, depending on their specific portfolio objectives.

Can you elaborate on the concept of “shared value” in business investment activities and how it combines the desire to create social impact with investment performance?

You’ve provided a comprehensive overview of the concept of ‘shared value’ in your question, emphasizing the harmonious coexistence and balance between business performance, typically financial performance, and sustainability goals. It’s essential to explore the motivations behind adopting ‘shared value’ as a business objective. In other words, what drives the integration of financial and sustainability performance? This remains somewhat unclear, as there are instances where either financial or sustainability goals dominate. Moreover, when considering ‘shared value,’ it’s possible to argue that both business financial performance and sustainability goals are not necessarily competing objectives but rather can be compatible with each other.

ESG investment involves an assessment process based on a company’s ESG index. Could you provide more insights into the ESG index and the factors it encompasses?

An ESG index serves as a comprehensive evaluation of a market’s sustainability performance, breaking it down into the environmental, social, and governance components. This index offers valuable insights into a company’s sustainability performance relative to established criteria. Currently, numerous ESG indexes exist, each employing diverse methodologies for calculating ESG metrics. Calculating these metrics is a complex task involving a wealth of data and data points, flowing into a single calculation—picture a tree-diagram with many branching root layers and sub-layers of data. This data can come from various sources, including audited annual reports, corporate disclosures, stock filings, news reports, and both qualitative and quantitative data. These data points cover a wide range of aspects, including emissions, innovation, product responsibility, and CSR strategy, among others.

Could you share some real-life examples illustrating “greenwashing” behavior in practice?

Greenwashing entails the dissemination of deceptive information regarding a company’s environmental credentials. Common instances include the use of clever language to obscure actual environmental impacts and the incorporation of green imagery to enhance environmental perceptions. For instance, there have been cases where business initiatives suggest that a portion of sales proceeds will be donated or utilized for environmental causes. However, suspicions about greenwashing arise concerning the actual donation amount and the definition of these proceeds. It has been observed in the past that some companies do not fully disclose that “proceeds” represent what remains after covering all expenses.

Why is greenwashing becoming a more serious issue, and how does it impact the market and investors?

Greenwashing, like other forms of disinformation, can vary in severity. However, it introduces distortions into the market that, if left unaddressed, can lead to heightened market uncertainty and potentially deter investment. Given the interconnected nature of financial markets, these distortions can have ripple effects. For example, a significant greenwashing scandal may negatively impact a bank’s balance sheet, reducing its lending capacity and profitability. On the demand side, it can restrict access to funds.

In the context of the increasing demand for ESG investments, can you describe efforts to mitigate the impact of greenwashing and evaluate their effectiveness?

Efforts to combat greenwashing include the promotion of ESG and sustainability reporting, encouraging companies to disclose information across all ESG dimensions. There is also a push to establish a standardized framework for ESG reporting. However, consolidating these diverse elements into a single ESG score presents challenges. The growing volume of data required for ESG reporting increases the risk of data points being susceptible to greenwashing. Unfortunately, there is no one-size-fits-all solution to this issue, and it may continue to be a challenge as we progress in the ESG journey.

Many countries and organizations employ various methods to calculate ESG effectiveness. What role does a common framework in ESG calculations play in improving consistency in business ESG reporting?

The implementation of a common framework could substantially enhance the comparability of ESG scores, although achieving this on a global scale might be challenging. It’s crucial to acknowledge that many ESG methodologies are proprietary and hold significant commercial value. Expecting private entities to fully disclose their proprietary methodologies might not be practical. The argument leans towards advocating for a standardized foundational framework. While this may work at the extreme ends of measurement, challenges arise as we move towards the middle. The complexity of permutations and dimensions makes it difficult for a one-size-fits-all framework to cover all scenarios adequately.

How can individuals navigate sophisticated greenwashing practices, especially in the technological sphere?

As awareness of greenwashing grows, it’s likely that these practices have evolved, especially in the technological sector. While not foolproof, individuals can look for recognized certifications that offer a level of protection and reassurance. For instance, certifications like EnergyStar evaluate energy efficiency ratings, and the Global Organic Textile Standards (GOTS) ensure fabrics meet specific environmental and social standards. An essential strategy in combating greenwashing is to stay vigilant and continually expand one’s knowledge base.

What is your perspective on the future of ESG investment, and how can regulatory bodies ensure transparency and honesty in this field?

When considering ESG investment, particularly in portfolio creation, evidence suggests that it may not necessarily lead to increased returns. However, there is an indication that ESG investing can contribute to performance by minimizing losses. This aligns with existing investment literature, particularly regarding investment horizon censorship. In ESG investing, censorship is fundamentally based on the ESG score. There is a concerted effort for sustainability reporting to reduce informational asymmetries. Still, regulatory bodies should also consider the associated costs related to increased sustainability reporting.

Reported by The Ky

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