Impact measurement can be an effective tool in overcoming “greenwashing” and finding out whether products have been launched more for marketing purposes than because of a drive to deliver positive social and environmental outcomes. If it becomes clear that the commitment to ESG is only skin deep, then investors need to have their guard up.
Taxonomies of what constitute green investments can also provide a strong defense against greenwashing. Such frameworks have been developed by the US, EU, Singapore and Malaysia. It would be useful to have as much alignment as possible between different regimes, but it may not be possible to develop a single global taxonomy because definitions may vary between developed and developing economies and the bar should not be set so high that it discourages European investment in Asia, for example. Taxonomies will also inevitably need to evolve over time as countries progress in their transition to a net-zero economy.
It is also important to recognize the difference between ESG investments and impact investing, which lie at different points on the investment strategy spectrum, between traditional investments at one end and pure philanthropy at the other.
While impact investing puts impact before financial returns, ESG investments prioritize profitability, with positive social and environmental effects seen as a nice add-on. They have to increase revenue, reduce risk, reduce cost or improve reputation for those making the investment. And they may just involve screening for positive or negative factors to ensure that an investment is future-proof, devoid of reputational risks or simply likely to benefit from ongoing trends. This might mean investing more in pure electric vehicle-OEM companies, rather than internal combustion engines, because of the shift towards electrification, for example.
Inevitably, the real impact of ESG investments will therefore be lower than that of impact investing, which may focus on areas of greatest need such as projects for primary healthcare and primary education in sub-Saharan Africa and Southeast Asia that are not investment options from a conventional financial perspective.