ESG Strategy, Greenwashing, and Shielding Poor Economic Performance

PGIM is the global investment management business of Prudential Financial, one of the top 10 largest asset managers in the world with over $1.5 trillion in assets under management. Eugenia has recently published a white paper on ESG and greenwashing.

While companies and investors are guilty of greenwashing—both unintentionally and intentionally—the perception is larger than the reality. This is due to different understandings of ESG’s definitions and investors’ expectations. Like all investing, ESG is subjective and therefore must be individually tailored to meet investors’ objectives. Asset managers should focus on what the investors want from ESG and what trade-offs they are willing to take, be it lower returns or higher risk.

ESG can add value in two ways: 1) manage investment risk and identify opportunities; and 2) generate environmental and social benefits. While environmental and societal benefits are currently more popular in Europe, they also add to the complexity of ESG given that different investors have different time horizons and risk-adjusted returns expectations. ESG is not a one-size fits all— rather “it’s like 1,000 sizes … to fit a million different needs.” Moreover, the subjectivity in ESG “ratings and rankings” causes a very low correlation among ratings. The best-known raters and rankers still focus on “risk and opportunity,” and a high ESG score still equals low ESG risk.

Impact investing has traditionally focused on its intended impact, including environmental or social benefits. However, impact investing is now also considered a solutions-based strategy which tends to be both high-risk and high-reward.

International commitments are coming under fire because banks and other companies are hesitant to agree to UN “mandates” that limit financing for “non-ESG” companies, such as fossil fuels and weapons manufacturers. While the commitments are admirable, each company must carefully decide how to engage with their commitment. While CEOs do sometimes use greenwashing to shield poor financial performance, asset managers are usually able to decipher this by analyzing the numbers.