The growth of ESG and sustainable bond markets has gone hand in hand with mounting concerns over ‘greenwashing’. The concerns are ubiquitous and largely justified. Much of the surge in ESG has been driven by relabelling existing funds, embellishing – or misrepresenting – investment products by reference to ESG characteristics. References to decarbonization and social responsibility are often little more than an asset management marketing ploy. The EDHEC Business School found that on average, climate scores represented just 12 percent of the weighting criteria in ESG portfolios, and that – perversely – high-emissions sectors could benefit by skewing performance criteria to reductions in emissions, rather than overall volume. Research by Util, a fintech company, using machine learning to derive the social and environmental impact of company portfolios, used the 17 SDGs to compare the impact of funds branded as sustainable against non-sustainable funds. It found no discernible difference.139 Questionable ESG standards and ratings result in uncertainties about how to measure the impact of ESG funding. Given the relatively light or non-existent penalties for non-compliance on the part of borrowers and investors, incentives to deliver results are often weak – and financial return considerations heavily outweigh ESG criteria. Moreover, because finance is fungible, some firms and countries may secure ESG financing while diverting other sources of financing to non-ESG activities. Weak and inconsistent monitoring is a limitation in ‘E’-related areas such as carbon disclosure and environmental damage. In other areas relevant to SDG delivery – notably human rights and social impacts – monitoring is typically conspicuous by its absence or irrelevance. ‘Greenwashing’ and ‘sustainability washing’ pose a threat to the development of ESG markets that could support the recovery or progress towards the SDGs. The rapid growth of global ESG investing has taken place across jurisdictions and financial sectors with variable and inconsistent reporting, monitoring and regulatory standards. Regulators have expressed concerns over product misrepresentation. Portfolio managers often cite data quality issues, multiple disclosure standards and the lack of a globally agreed taxonomy as obstacles to properly measuring risks, opportunities and impact related to sustainability.140 As the G20 has commented, the proliferation of standards could “contribute to higher transaction costs, lack of transparency, market segmentation and risks of green and SDG washing.”141 The problem to be addressed is not a deficit in high-level reporting standards, but rather a lack of consistency across jurisdictions, taxonomies and themes, allied to weak verification of sustainability benefits delivered.142 The International Financial Reporting Standards Foundation is now developing under G20 auspices a baseline global sustainability reporting standard focused on climate to provide more robust governance and public oversight.
4.7 Sustainability bonds demonstrate the potential for SDG-related financing Despite the downturn in bond financing for developing countries (excluding China) in 2020, several developing countries used the market to support pandemic response. Peru, one of the countries hit hardest by the crisis, was able to use its strong macroeconomic position to market a $4 billion Eurobond
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Steyn, Elisabeth and Jose M Lopez Sanz, ‘How SDG-aligned is ESG? Putting sustainable funds to the test’, Util. September 2021. Nearly half of investors in one market survey thought harmonizing global standards, taxonomies and metrics should be the top ESG priority for national regulatory frameworks. See Capital Group ESG Global Study 2021 (a marketing communication), https:// www.capitalgroup.com/content/dam/cgc/tenants/eacg/esg/global-study/esg-global-study-full-report(en).pdf G20 Sustainable Finance Roadmap, 7th October 2021 Ehlers, Torsten, Diwen (Nicole) Gao and Frank Packer, ‘A taxonomy of sustainable finance taxonomies’, BIS Papers No. 118, Bank for International Settlements, October 2021.
CHAPTER 4. FINANCING FOR AN SDG RECOVERY: BRIDGING THE GAP
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