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Environmentally, socially and governance-minded investors got the organic, grass-fed and carbon-neutral wool pulled right over their eyes.
A Bloomberg research report released on Tuesday sheds light on how the murky world of so-called sustainable credit tools works. Instead of targeting financial incentives to encourage climate-friendly change, these largely unregulated tools have allowed companies to sidestep real action at the expense of investors. They usually spit out hot air.
Thanks to the tectonic shift from active to passive management, fund investors’ fees have steadily declined for decades. ESG-focused investing is Wall Street’s latest invention to counteract this trend – a New and glittering Vehicle charging higher fees because it is 1) “complicated” and 2) in tune with the zeitgeist. A recent study by Morningstar found that the average ESG fund is 0.20% more expensive than a traditional fund, which they dubbed “Greenium.”
So-called green bonds were introduced to credit markets in 2008, but proceeds were limited to discrete projects like a new solar field. Newly issued sustainability-linked bonds (SLBs) allow borrowers to leverage the proceeds more broadly with a simple premise: if the borrower misses the climate targets set out in the loan documents, the interest rate increases. Sounds virtuous on paper, but the system is loaded with more holes than the ozone:
- When luxury giant Chanel launched a €600m SLB in 2020, one of the underlying climate regulations included a 10% reduction in emissions from suppliers and customers by 2030. At the time of the issuance, unbeknownst to investors, Chanel had already reduced issuance by 21%. A Chanel spokesman told Bloomberg the company was in the process of “finalizing data for 2019” and was unaware that it had already achieved its goal. In other words, they took an imaginary hurdle.
- UK supermarket chain Tesco has set a target of reducing “direct emissions” by 60% by 2025. Conveniently, ‘direct emissions’ account for just 1.6% of Tesco’s total carbon footprint, and in its latest sustainability report the company revealed it’s already 90% of the way there. planet saved.
blinkers on: Through the SLB programs, Bloomberg found that under the auspices of the climate goals, companies of all types can borrow at below-market rates and demand for the bonds is up to five times greater than supply. Ulf Erlandsson, CEO of the Anthropocene Fixed Income Institute, told Bloomberg: “I would say, ‘Hey guys, you guys think I’m a fool. “Fooling investors is definitely not sustainable.