Survey: Investors Embrace Renewables, Not Ready to Let Go of Fossil Fuels

Do you think more companies will commit to sustainable standards in the coming future? Why?

Yes, companies will continue to migrate towards sustainability and sustainable standards as is demanded by consumers, investors, and financers. At this point in time, certainly large companies must have a sustainable presence or they will be penalized by investors who are looking for sustainable investing. I only expect this to grow.

What sort of regulations do you foresee that will ultimately prevent companies from inflating their sustainable practices (a.k.a. greenwashing) and how can consumers make more educated decisions on which sustainable funds to invest in?

I believe the biggest problem with greenwashing is that we don’t have any standard definition for what “sustainable” means. For some it is lowering a carbon footprint. For others it is how goods and energy is sourced. Others may look at water or plastics. While they are many sustainability ratings agencies they don’t all use the same standards or formula, which is how ExxonMobil made it on to the Dow Jones Sustainability Index this year, while Tesla was kicked off.

But moving forward, I foresee more government standardization of disclosure practices. Currently the Securities and Exchange Commission (SEC) is proposing rules to standardize greenhouse gas emission reporting, and also to standardize what ESG labels need to mean for investment companies. This will at least bring about more common definitions and thus better align what companies are doing with actual consumer and investor expectations.

Do you think more companies will commit to sustainable standards in the coming future? Why?

Yes. Here are six reasons.

1. Regulations will force them to do so. The Securities and Exchange Commission Rule (Release Nos. 33-11042; 34-94478; File No. S7-10-22) could be effective as early as next year. This applies to all U.S. registered public companies other than small businesses. SEC oversight will flag misleading or incomplete compliance. Publication of misleading or incomplete compliance will affect company reputation and decrease shareholder value.
2. NASA/DoD/GSA contractors will be required to disclose sustainability information (Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk (48 CFR Parts 1, 4, 9, 23 and 52) to acquire a contract. This will apply to all U.S. government contractors other than small businesses. The federal contractor rules could be effective in 2024, with the first disclosures the following year. Government contracts would simply not be signed if there is non-compliance. Such loss-of-opportunity penalty would be substantial. GAO publication of misleading or incomplete compliance would also affect company reputation and decrease shareholder value.
3. California SB 260 and the AB32 scoping plan to reduce emissions to at least 40 percent below 1990 levels will likely pass during the next session (in 2023) of the State government. Once implemented in California, other states will follow.
4. Shareholder activism will force them to do so. Shareholder proxy statement activism on climate- and sustainability-related action is at an all-time high (As You Sow 2022). These shareholder engagements increase pressure on firms to adopt and disclose on science-based targets.
   Focal firms also suffer when a peer firm adopts ESG principles. However, some shareholder actions can force firms to internalize costly negative externalities, which generates lower returns.
   However, as ethical investors benefit, a profit maximizing firm may decrease in value and offer lower returns for the non-pecuniary benefits of a firm engaging in an ESG strategy. Ethical investors, however, are willing to accept lower returns for climate-related benefits.
   Large institutions acting as ESG gadfly investors have generally increased shareholder value.
   Voluntary ESG disclosure in response to shareholder engagement generally increases firm value.
   The trend of a higher number of independent board member also increases the likelihood that a firm will act on climate issues. Greenwashing is also monitored by U.S. government agencies.
5. Voluntary disclosure will force them to do so. Risk underpricing through lack of ESG disclosure is becoming increasingly obvious to investors and asset managers.
   To avoid market shocks and contagion all of which is unnerving for markets, firms will have to increase ESG disclosure and, thus, be more transparent about climate and ESG risk.
6. Appointment of chief sustainability officer and sustainability-based compensation based on meeting targets will increasingly occur and incentivize more ESG action and disclosure.

What sort of regulations do you foresee that will ultimately prevent companies from inflating their sustainable practices (a.k.a. greenwashing) and how can consumers make more educated decisions on which sustainable funds to invest in?

In rough order of importance, here are seven forms of regulation or other activity that will ultimately prevent and punish companies from inflating disclosure on their sustainable practices. Private equity investments will also play a major role.

1. Enforceable regulations will be implemented in the near future (SEC disclosure rules, NASA/DoD/GSA contractor rules).
2. The Courts will redefine the concept of financial materiality to include civil liability for intentional actions or gross negligence that result in omitted or misleading ESG information for outsiders.
3. Whistleblower actions will relate more to ESG. Whistle-blower laws already on the books (e.g., SEC, EPA) will increasingly be used to expose lies, misleading disclosures, and greenwashing.
4. Increased use of anti-SLAPP protection for employees and citizens. Under anti-SLAPP law, current and past employees have free speech protection for speaking out on misleading and omitted information issued by a company. Anti-SLAPP free speech protection will increase the accuracy and quality of public information on ESG about a firm.
5. Regulations that indicate specific measures and science-based targets will become more commonplace. When science-based targets are met or not met investors listen carefully and respond quickly. Just as earnings surprises drive the markets, so too will ESG metric surprises (e.g., reduction in emissions).
6. Increased monitoring of environmental metrics. Research is now better at identifying virtue signaling firms. This research, based on machine learning and sentiment analysis, is becoming increasingly available to investors and the public. E.g., ClimateBert. The Federal Trade Commission also is involved in monitoring greenwashing.
7. Auditor involvement to provide assurance of quality and consistency with a disclosure framework such as that of the TCFD. Auditor involvement is a key element of the SEC proposal. Adherence to the TCFD framework is also a part of the NASA/DoD/GSA rules.
   Private Equity. The increased role of solutions offered by private equity will lower the cost and improve the quality of ESG information available for investors. It will reduce public distrust, also a concern.
   According to PitchBook.com, at least $1 billion of private equity has already been invested in carbon mapping solutions for firms.
   Watershed is already worth more than $1 billion in market capitalization.
   The world market size for clean tech is substantial, expected to be $3 trillion by 2025. According to the International Energy Agency (IEA), the global CleanTech market will surpass the value of the oil market by 2030.

A brief counterargument on greenwashing. Just as many critics complain about the worrisome effects of "earnings management," the prevalence and impact of greenwashing may be overblown, especially when product quality is high, according to Harvard Business Review research. Moreover, investors and others may have already factored it into firm values and return expectations. Countries with stricter regulations already have less greenwashing. The literature on greenwashing may also be biased to find “positive” results, which are more easily published.