DWS, HSBC… a plea for impact and dual materiality

Following the criticism of those who think that green finance is an ‘illusion’, the attacks of a former follower like Tariq Fancy, the resurgence of interest in gas or armaments following the war in Ukraine, the news has been marked in the last few days by the speech – followed by the suspension – of Stuart Kirk at HSBC, and then the raid at DWS.

What do these events tell us about greenwashing and ESG?

First of all, we certainly overestimate the amount of assets that are really managed by seriously taking into account environmental and social criteria. And to tell the truth… we suspected it.

When we see the growth over the years of the assets under management of PRI signatories or, in France, those of SRI-labelled funds, we can feel that something is wrong. If these amounts were really significant and if ESG funds had an impact, then the economy should have changed radically.

That is obviously not really the case. So either these amounts are inflated because the criteria used to calculate them are far too lax, or this ESG management has no real impact on the transformation of the economy. Or a little bit of both.

US senator suggests Stuart Kirk suspension early indicator of 2008-style financial crisis

Secondly, these criticisms and reversals from industry players show that many managers who have recently converted to ESG management, by force of circumstance, do not fundamentally believe in the short-term financial impact of these techniques. To be fair, there again… we kind of suspected as much.

Most of the industry uses ESG criteria with a logic of financial materiality and not with the intention of creating a positive impact, and since this short-term financial materiality is indeed weak, as Stuart Kirk says, this ultimately leads to nothing changing in our performance calculations. In other words, greenwashing.

What lessons can we draw from this situation? First of all, most of these statements are well-founded: Stuart Kirk is right to say that the short-termism of the markets does not allow us to take the climate into account; Tariq Fancy is right to say that the intentions of the major asset managers are weak when it comes to environmental and social impacts; the regulatory authorities are right to be interested in the increasingly obvious discrepancy between the announcements of glittering figures for sustainable finance and reality; and finally, those who have been scalded are not totally wrong to think that all this leads to a certain amount of illusion.

My main fear today is that we are throwing the baby out with the bathwater. The evolution of finance is indispensable. We simply need to understand that it is only the use of ESG criteria in a ‘dual materiality’ perspective that is of interest and can create impact. In other words, environmental and social criteria are only useful if we go beyond short-term financial materiality and if we measure the impact of companies on these subjects.

Obviously, this represents much smaller amounts than the trillions that have been announced. And if we want sustainable finance to resist this wave of scepticism, recent events must be transformed into a plea for impact finance.

Philippe Zaouati is CEO of Mirova

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