How do you build a sustainable investment portfolio that doesn't give in to the suspicion of greenwashing, that is credible? While signatories to the Principles for Responsible Investment (PRI) account for two-thirds of all assets under management worldwide, reflecting an impressive accounting success for sustainable finance, this suspicion is now widespread, both among external observers and within the financial industry itself. Following in the footsteps of academics and non-governmental organizations (NGOs), stock market regulators have recently begun to denounce greenwashing, i.e. the tendency to present a product as greener than it really is.
Comparing companies’ promises and practices
These ratings have been produced based firstly on a forward-looking reputation score. Narrative ESG data (press articles, communications from NGOs, trade unions and other sources) are first filtered according to the time horizon they cover: information about companies' promises and commitments, such as net-zero CO2 emissions by 2030 or 2050, are identified and marked as forward-looking data. A forward-looking reputation score is then calculated with this information, taking into account the proportion of positive news in relation to all positive and negative news.
The aim is to identify companies that actively communicate their commitments and resolutions for the future, and whose communications are widely relayed and approved by third parties. This measure is combined with an overall ESG score, based on both qualitative information and quantitative indicators. Then, to ensure the credibility of the ESG leaders thus identified, we also calculate a backward-looking reputation score, which is based on information covering the past. We compare companies' promises and practices. If there is a significant discrepancy between the forward-looking and backward-looking reputation scores, this signals a risk of greenwashing, and prompts us to exclude, or underweight, the stock concerned from an investment universe. The aim is to select companies that are both ambitious in their commitment to sustainability and responsible in their current practices. Here are a few examples of credible ESG leaders, according to this approach.
Schneider Electric, a French group active in automation and energy management, has set decarbonization targets validated by the Science Based Targets initiative (SBTi) on scopes 1, 2 and 3, with milestones set for 2025, 2030, 2040 and 2050. Schneider Electric is also aiming for zero net loss of biodiversity in its direct operations by 2030. Finally, the Group is committed to access to green electricity in developing countries, with targets for 2025 of 50 million people benefiting from access to electricity, 1 million receiving electricity training, and support for 10,000 entrepreneurs. Considering information on Schneider Electric's past practices, we also observe a high reputation score and a low level of controversy, which reassures us about the credibility of its commitments for the future.
Trane Technologies, which produces heating, ventilation and refrigeration equipment, also has a decarbonization plan validated by SBTi. The company's ambition is to enable its customers to reduce their CO2 emissions by one gigaton by 2030, equivalent to the emissions of France, Italy and Great Britain combined.
Helping customers decarbonize
SGS, a Swiss group and world leader in inspection, verification and certification services, offers solutions enabling its customers to measure the carbon footprint of their products, improve their energy efficiency and measure their impact on biodiversity through environmental DNA analysis.
Back to France with L'Oréal, which dominates the global cosmetics market, and also has a strong commitment to sustainable development, such as the goal of using 100% recycled plastic packaging by 2030, and investments in companies developing PET bio-recycling techniques and organic ingredients for cosmetics.
Last but not least, Owens Corning, a US-based manufacturer of building materials, also has a proactive sustainability strategy. For example, it aims to recycle 2 million tons of asphalt shingles by 2030 and is tackling the recycling of used wind turbine blades.
Caution is required
What these five companies have in common is that they all have good ESG scores, as well as high forward-looking and backward-looking reputation scores, which reassures us about the credibility of their sustainability trajectory. Conversely, some companies meet the first two conditions (high ESG and forward-looking reputation scores), but not the third, as a worrying volume of controversies taints their backward-looking reputation and generates a risk of greenwashing and doubts about the sincerity of their commitments for the future. Johnson Controls, for example, is the subject of legal proceedings concerning PFAS water pollution in Wisconsin (USA), while the Indian company Infosys is accused of discrimination in hiring on ethnic and gender grounds. This is not to denigrate their efforts or to reject these companies outright, but to encourage managers to redouble their vigilance when building a sustainable investment portfolio.
This article has been originally published in French in allnews. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.