Why the grass isn’t always greener

5 min read
5 min read

Greenwashing occurs when a company—deliberately or otherwise—projects the perception that it and its products are environmentally more sustainable than they actually are. Also referred to as ‘green sheen’, greenwashing is attempting to cash in on growing consumer demand for all things green.

As a result, a growing issue for investors is how to avoid companies who don’t practice what they preach. How do funds strategically—and with certainty—only invest in companies with certified, credible sustainability practices?

The way forward for SRI labels

Socially Responsible Investing (SRI) labels are useful for retail investors to better understand what they invest in, as it effectively provides a stamp of approval that what they buy is good quality.

However, strategies that only apply simple exclusions and are still labelled as being sustainable should be a thing of the past. Investing sustainably is also much more difficult than buying a set of environmental, social and governance (ESG) scores and applying it to a portfolio.

Furthermore, it’s important these labels are not too prescriptive about how sustainability is implemented in the funds.

There are clearly areas that sustainable investors want to avoid, such as tobacco, weapons, breaches of labour standards and human rights, and certain types of fossil fuels like thermal coal.

Other areas, however, are less clear. Traditional fossil fuels, for example, are a big contributor to climate change, however, they’re still widely used and needed. There are those who believe that energy companies are both part of the problem and the solution.

The question is whether being invested in these companies and engaging with them might be a better way of creating change than avoiding them all.

Current labels do differ in their approach, largely because the global approach to sustainability investing differs so greatly. The French SRI label, for example, focuses more on the investment approach, process and transparency. It’s externally verified so more stringent in how it’s assessed, with the right data, processes and procedures needed to obtain the label.

The Belgian label is much more prescriptive, specifically on what not to invest in. However, even this leaves a lot of room to maneuver, and asset managers still need to do their own research.

Transparency, of course, is key – asset managers need to clearly show what is and what is not part of the strategy of the fund, no matter whether it is called sustainable or responsible, or something else entirely.

The risk is that it can become a box-ticking exercise. If funds do exactly what is needed to gain the label, they have no incentive to do their own research, to really think about sustainability at a deeper level, or to innovate.

If the label is too prescriptive it will only be attainable for a small number of funds and sustainability will remain a niche.

Labels should be focused more on making sure that the fund manager communicates what the strategy entails and shows that it does what it promises. A certain level of minimum standards can definitely be required, but again, not too prescriptive.

Does the strategy stack up financially?

A strategy is only sustainable if it’s also financially sustainable. How do long-term ESG trends and external costs such as climate change, loss of biodiversity and rising inequality lead to changes in business models? ESG investing no longer means only reducing an investment universe to the ‘best-scoring’ names. It means thinking hard about sustainability and how it affects companies and investment strategies.

If two stocks have equal (financial) factor scores, the one with the better ESG score could for example have a higher weight in an integrated strategy. In a fundamental equity strategy, ESG could affect the valuation, or the target price if analysed systematically.

Structurally integrating ESG information into the investment process helps investment teams make better decisions. It does not, however, reduce the universe, and they are still allowed to invest in companies with low ESG scores so long as they believe the risks are more than priced into the market.

This method of integrating ESG, although infinitely more difficult and profound in its application than only using ESG scores to reduce the universe, is often not categorised as a sustainable strategy. Clients who want to invest in sustainable strategies simply do not want to invest in ‘bad’ ESG companies, even if this is already reflected in the share price.

Consideration for active ownership

Another way of implementing sustainability is through active ownership. Active owners should adopt a structured approach in tackling themes that other investors are not even thinking of yet. For instance, this year, Robeco—as an active owner—started to engage on digital healthcare and the social impact of artificial intelligence. Both themes are very much forward looking and related to both new technologies and sustainability issues: the first aiming to tackle rising health care costs, and the second looking into the social risks that might occur in the long term.

Voting behavior is also interesting. Research shows that some of the larger (passive) investors almost always vote with a management’s recommendation, even on shareholder proposals relating to environmental and social issues. However, social and environmental shareholder proposals are becoming better formulated and more in line with long-term shareholder value creation.

So, as the adoption of sustainability investing continues to rise, so too do the challenges associated with the process. How should SRI labels be applied and, perhaps more importantly, how should they be monitored? And are there alternative means for investors to access SRI funds, such as through active ownership? Through each part of this process, transparency is vital.

Picture of By Masja Zandbergen

By Masja Zandbergen

head of ESG integration

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Carmen Beverley-Smith

Executive Director - Superannuation, Life & Private Health Insurance, APRA

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Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Carmen joined APRA in March 2023 and holds the role of Executive Director, Life and Private Health Insurance and Superannuation.  

She has had an esteemed career in financial services, spanning over 25 years. She has held diverse leadership roles at Westpac and Commonwealth Bank of Australia, including across risk, transformation and change, product and portfolio development, and sales and service. 

Prior to joining APRA, she held the role of General Manager, Risk Transformation Delivery Integration at Westpac. This involved leading the group-wide implementation of a suite of solutions to uplift risk management capability and develop data, analytics and reporting. 

Carmen leads with a values-driven approach and a particular interest in developing and mentoring talent. 

She holds a Bachelor of Commerce and Accounting, is a certified Chartered Accountant and a Graduate of the Australian Institute of Company Directors. 

Amy C. Edmondson

Novartis Professor of Leadership and Management, Harvard Business School

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Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Amy C. Edmondson is the Novartis Professor of Leadership and Management at the Harvard Business School, a chair established to support the study of human interactions that lead to the creation of successful enterprises that contribute to the betterment of society.

Edmondson has been recognized by the biannual Thinkers50 global ranking of management thinkers since 2011, and most recently was ranked #1 in 2021 and 2023; she also received that organization’s Breakthrough Idea Award in 2019, and Talent Award in 2017.  She studies teaming, psychological safety, and organisational learning, and her articles have been published in numerous academic and management outlets, including Administrative Science Quarterly, Academy of Management Journal, Harvard Business Review and California Management Review. Her 2019 book, The Fearless Organization: Creating Psychological Safety in the Workplace for Learning, Innovation and Growth (Wiley), has been translated into 15 languages. Her prior books – Teaming: How organizations learn, innovate and compete in the knowledge economy (Jossey-Bass, 2012), Teaming to Innovate (Jossey-Bass, 2013) and Extreme Teaming (Emerald, 2017) – explore teamwork in dynamic organisational environments. In Building the future: Big teaming for audacious innovation (Berrett-Koehler, 2016), she examines the challenges and opportunities of teaming across industries to build smart cities. 

Edmondson’s latest book, Right Kind of Wrong (Atria), builds on her prior work on psychological safety and teaming to provide a framework for thinking about, discussing, and practicing the science of failing well. First published in the US and the UK in September, 2023, the book is due to be translated into 24 additional languages, and was selected for the Financial Times and Schroders Best Business Book of the Year award.

Before her academic career, she was Director of Research at Pecos River Learning Centers, where she worked on transformational change in large companies. In the early 1980s, she worked as Chief Engineer for architect/inventor Buckminster Fuller, and her book A Fuller Explanation: The Synergetic Geometry of R. Buckminster Fuller (Birkauser Boston, 1987) clarifies Fuller’s mathematical contributions for a non-technical audience. Edmondson received her PhD in organisational behavior, AM in psychology, and AB in engineering and design from Harvard University.

 

Daniel Mulino MP

Assistant Treasurer and Minister for Financial Services

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Keynote 8 – Navigating the energy transition: opportunities, investor strategies and policy needs

Born in Brindisi, Italy, Daniel was a young child when he moved with his family to Australia. He grew up in Canberra and completed his first degrees – arts and law – at the ANU. He then completed a Master of Economics (University of Sydney) and a PhD in economics from Yale.

He lectured at Monash University, was an economic adviser in the Gillard government and was a Victorian MP from 2014 to 2018. As Parliamentary Secretary to the Treasurer of Victoria, Daniel helped deliver major infrastructure projects and developed innovative financing structures for community projects.

In 2018 he was preselected for the new federal seat of Fraser and became its first MP at the 2019 election, re-elected in 2022 and 2025. From 2022 to 2025, Daniel was chair of the House of Representatives’ Standing Economics Committee in which he chaired inquiries; economic dynamism, competition and business formation and insurers’ responses to 2022 major floods claims.

In 2025, he became the Assistant Treasurer and Minister for Financial Services.

In August 2022, Daniel published ‘Safety Net: The Future of Welfare in Australia’, which aims to explore the ways in which an insurance approach can improve the effectiveness of government service delivery.