Downgraded green credentials for hundreds of investment funds and an increasingly polarised political US debate on ESG investments are shaping the current industry debate on sustainable finance. Joachim Nahem, sustainability expert and chief executive at Oslo-based Position Green, notes the emergence of a new concept that has taken over from greenwashing: green hushing.
Last summer’s raids on the Frankfurt offices of DWS has instilled a widespread fear of greenwashing accusations among asset managers worldwide. In Europe, investment firms have lowered their ESG classifications for hundreds of funds under the EU’s Sustainable Finance Disclosure Regulation, or SFDR. Many of these funds are domiciled in Luxembourg, which takes pride in the green ambitions of its financial hub. In recent months, increasing political discussions in the US have seen major asset managers lose business in a number of Republican states. The fears now have also reached the private equity and venture capital community.
“In the past year, we have seen it pivot from green euphoria to green fear,” said Nahem in an interview with Investment Officer for an IO Talks Luxembourg podcast, recorded at the 0100 Private Equity and Venture Capital in Amsterdam. Nahem is a former United Nations advisor who now provides software services to investment firms that need to get to grips with ESG and sustainability requirements.
Asked how clients deal with the ongoing discussions on greenwashing in the financial sector, he drew attention to a newly emerging concept: “green hushing”. Many investment firms - those managing public funds as well as private funds - and investors now refrain from speaking about green finance in public. “They are afraid to be called out”.
In the crosshairs of US politics
“There is fear from a regulatory perspective, such as saying that an Article Nine fund may not be Article Nine, but also because it is coming into the cross hairs of politics in the US,” Nahem said. “A lot of PE’s, a lot of investment funds are afraid of being too vocal on ESG because they just don’t want to end up in the middle,” he said, adding the latest annual letter of BlackRock chief Larry Fink did not mention ESG. “He didn’t use the phrase for that reason.”
The industry, however, can’t afford to ignore ESG because regulation requires firms to deal with it. “This is really where we need to separate between noise and substance. There is a lot of noise, especially in the US, but both regulators and customers are demanding information,” he said.
Greenwashing concern both positive and negative
“This greenwashing concern is both a positive and a negative driving force. On the positive side, it obviously has to do with the need to regulate this space. You can’t have fund managers - or anyone else for that matter - offering what they call green products or green services without there being some kind of definition of what green is, where else everybody can claim to do it without actually having proper credentials on climate and environment.”
On the other hand, awareness in the industry has increased. “When you have German police raiding offices on the basis of greenwashing, or selling products that were supposed to be green, that gets people’s attention. The finance industry, broadly, whether alternatives, or public or private equity, has certainly been made aware of this.”
“Whether you are a supplier to the software industry, or oil and gas, or process industry, the big players demand that you have ESG credentials. You will not win a contract without them,” he said. “In the same way regulators both in Europe, and now most likely in the US through the SEC, proposed rules that will require companies to disclose on this. So they have to do it and they are doing it, but they’re maybe not speaking so loudly about it as they were before.”
‘We still need investors to want it’
The SFDR - “a pretty heavy regulation” - is something that many companies rare not yet prepared for. “Just getting that part right is extremely important,” Nahem said. “The downside, or where it may be a negative thing, is that we still need investors to want it, to sort of push the limit here and there, to take more risk in climate solutions. The downside may well be that we’re not going to make this investment in this particular company or this particular fund, because we are afraid of greenwashing, or being accused of greenwashing.”
Pension funds are a very important driver. That’s where the tone is set that is followed in other parts of the investment universe. “The ESG strings attached to the capital basically go through the entire industry. If you start with the large pension funds and you trickle down to private equity, the GPs and the LPs, the fund-of-fund, and the VCs, there are strings attached. There are ESG reporting strings attached.”