Fund managers that invest in or lend to ESG portfolio companies find themselves in a double bind. On the one hand, they are invariably subject to the accusation of “greenwashing”. On the other hand, the resources for tracking and transparency that are required to reduce the bite of such accusations, or to respond to them effectively if made, are expensive and distracting.
Natasha White and Greg Ritchie wrote recently on Bloomberg that bond issuers are “reviewing the merits of tapping the ESG debt market”, largely because greenwashing accusations have become a deterrent. It isn’t merely that the accusation itself carries reputational risk, but that regulators are becoming attuned to the issue.
In a presentation on 1 December 2022, Francisco Blanch, head of global commodities, equity derivatives and cross-asset quantitative investment at Bank of America Global Research, said that the Brent crude oil price may hit $110 per barrel in 2023. It is likely to average at $100, and West Texas Intermediate to average at $94.
For purposes of comparison, as Blanch spoke, the Brent price was between $83 and $84 a barrel.
On the face of it, companies that build electric vehicles are natural recipients of loans from green debt funds: they emit no carbon. Relatedly, they stand to benefit from increases in the price of fuel the competing vehicles use. But a private credit fund that lent to such a company and took those facts as the sole basis for claiming that this loan was a green investment, would surely attract accusations of greenwashing.
After all, the accusers would say, there is so much else to consider. For example: what is the carbon footprint of the manufacturer of the cars? Where does the EV manufacturer source the batteries? What are the environmental costs of that manufacturing process? What of the rest of the EV supply chain? What are the costs associated with the scrapping of the vehicle at the end of its useful life?
Looking at the whole industry not just firm level, we might ask questions about the recharging process and its costs, environmental and otherwise. Even the “E” alone of ESG vetting can become a complicated process before one even looks at the labour practices along the same supply chain.
What is the best way through this double bind? A fund that wants to document that it is not greenwashing – or, to put it more positively, that it has climate-target credibility – has to be willing to lay out the trade-offs. This is no easy task. But there are improved disclosure frameworks in the pipeline, which will enable better-informed investing and lending decisions going forward.
Write to the author at Christopher.firstname.lastname@example.org
This is the last of our Friday Letters for 2022, so we would like to take the opportunity to wish readers of this column a very happy and relaxing festive period. The Friday Letter will be back on Friday 6 January 2023.