BUSINESS
BY JOE SMITH
Green washing Why we mustn’t get complacent BP no longer describes itself as an oil company. Once named “British Petroleum”, the company now chooses to identify as an energy company. Recent television adverts show offshore wind turbines and solar panels, yet the majority of revenues generated still come from its traditional fossil fuel income streams. These marketing tactics have piggy backed the global sustainability movement. Some describe this practice as “green washing”. The company has indeed attempted to diversify its energy mix. However, rather than increase the total amount of renewable energy generated, they have instead opted to simply purchase these turbines from others. Often this has been at a lofty premium compared to the return on invested capital it experiences in other parts of its business. The danger here is that we become complacent, thinking that enough is being done when the supply of clean energy has not increased, simply changed ownership. The development of sustainability linked bonds, where coupon payments decrease if certain criteria are met and verified, or increase if not, has been a key innovation in the greening of finance. Similarly use of proceeds bonds, where covenants stipulate the exact use of the capital provided for green projects is another way investors can help in the climate fight.
You may be surprised to learn then that there is no regulation in what can be labelled a “green bond” and companies have been taking advantage of this to access lower costs of capital. Green washing is not only a corporate phenomenon. We have seen governments also deploy these tactics. Dig a little deeper and you will find that some of the “protected” waters off the British coast seek little more than to ban the practice of sea kayaking in the region – but if you are seeking underpopulated fish stocks or new oil and gas reserves then please, go right ahead. Thankfully, governments and institutions have recognised this as an increasing issue. Recently the FCA acknowledged the amount of UK listed funds filing to rename themselves as “sustainable” with little change to the investment process. On the continent, the European Union has this year, enacted the Sustainable Finance Disclosure Regulation (SFDR) legislation to tackle green washing issues. We must, however, be careful not to cause one problem by trying to fix another. The objectives of the SFDR and its focus on the UN Sustainable Development Goals (SDGs) are commendable but investors must be wary that we do not stray into “impact-washing”. Just because we can now map a fund’s holdings to the sustainable development goals does not mean that capital is invested with the intent of furthering these goals. It is a nuanced but crucial distinction.
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