How can institutions ensure they are maximizing rewards and mitigating risks of sustainable finance?

In recent years, sustainable finance has gained definitive momentum. It is no longer an option for institutions to not integrate ESG factors in their decision-making processes. In order to effectively participate in this global movement, companies and investors should embark on building strong sustainability strategies that incorporate quantifiable commitments to ESG targets – climate, biodiversity, social inclusion etc. – and also dedicate sufficient internal resources to support implementation. It is also increasable important to keep up-to-date on recent developments in the ESG data, disclosure, and regulatory landscape and network with peers who are seen as long time leaders in the space.

How do you feel we can better define greenwashing?

In my view, “greenwashing” would be something a company or a financial institution does intentionally to misrepresent themselves in order to cater to growing demands to be more environmentally and socially sustainable from public, civil society, investors, or regulators. There are many definitions of greenwashing out there, and most are capturing the essence of the term, which is deliberate and planned misrepresentation rather than investing in achieving actual and measurable sustainability targets.

I feel it is important, however, to distinguish between these deliberate mal-intentioned actions by organizations – and sometimes various levels of government – and genuine efforts to set and move toward sustainable outcomes while not supported by adequate internal capacity and knowledge to do so effectively. I believe that given the global rise of ESG in recent years most organizations today would not deliberately manufacture false data and information.

What is still missing in many places is solid expertise and sufficient allocation of priority and resources. For example, most international development finance institutions have large departments with thousands of people working on various aspects of ESG. This is a stark difference from ESG teams of banks and investors whose portfolios are often just as large and diverse but who often have less than a dozen staff on their ESG teams.

As a result, they tend to rely on data collected by third parties to make ESG commitments and prepare for regulatory reporting. While I see this “outsourced” operational model of as viable given how the ESG space has shaped up in the past decade, it has a certain disconnect with what is actually happening on the ground where it matters – in power plants, manufacturing facilities, and along gas pipelines. However, it would not be fair to label this disconnect and lack of resources as “greenwashing”. ESG is a relatively new space, and it will take time to mature.

What are the benefits of engaging stakeholders to accelerate change?

Involving a wide spectrum of stakeholders is critical for success of any ESG effort. It is not entirely possible to shape up an organization’s priorities in the sustainability space without seeking inputs from external parties, and equally from across internal units.

As a matter of fact, pioneering ESG efforts by companies and investors were originally driven by inputs from NGOs and civil society. Since public finance usually undergoes more scrutiny from such organizations, the first ESG frameworks out there – such as World Bank’s original framework first developed in late 1980s – were responding to calls for strengthening the role of financial sector in sustainable outcomes of projects it finances.

A continuous dialogue with external stakeholders can help an organization to better understand how it is perceived and what the expectations would be in terms of augmenting its positive impacts on environment and society. This information, in turn, can be used to build the case for channelling more resources to develop and grow a sustainability strategy. Internally, an ESG function can never succeed if it’s not well understood and supported by those who must contribute to and participate in achieving its goals.

Why is it essential to enhance transparency to mitigate greenwashing risks, and are we seeing regulatory requirements developing in order to mitigate these risks?

Transparency is essential to mitigate risks with any type of disclosure, not only ESG. There is a reasonable belief that putting everyone on the same page regarding what, for instance, sustainable investment products are and are not should help produce real outcomes and shift capital toward activities with positive environmental and social impacts.

In recent years, we have certainly seen a lot of progress on the regulatory front, most notably EU’s Sustainable Finance Disclosure Regulation (SFDR). However, I am wondering if increasing mandatory regulatory requirements for disclosure might serve as a perverse incentive for organizations that do not yet have the internal capacity to meet them.

In emerging markets, while the ESG regulatory aspects are not yet prominently present, international investors and development finance organizations often serve as de-facto regulators for local financial sector and companies. We do often see the struggle to meet high ESG thresholds of these international standards, benchmarks, and metrics. In these situations, it becomes evident that transparency alone will not be a sole correct solution and enhancing capacity and knowledge should go hand in hand with pushing for better disclosure.

What are the impacts of regional variation in effective sustainability strategy?

If regional variation is understood as global disparity in progress made by both regulators and private sector toward integrating ESG criteria in decision-making, then it can have significant impacts on building a sustainability strategy, especially for investors. Available data, disclosure requirements, and overall relevant regulatory environment will vary greatly thus making it challenging for a global investor to implement its ESG requirements uniformly.

While some of the world’s biggest economies, notably EU, North America, Japan, Brazil, China are all announcing intentions and commitments to upscale ESG disclosure requirements, financiers that work predominantly in the developing world will continue to face challenges. In such environments with significant regulatory gaps, developing and implementing a robust sustainability strategy becomes even more critical for a financial institution to ensure that ESG risks do not negatively impact its bottom line. At the same time, opportunities for impact investing may also be greater.