Eco Voice Q & A: Pablo Berrutti, Senior Investment Specialist, Stewart Investors

Pablo Berrutti, Senior Investment Specialist, Stewart Investors

Background

Pablo is a senior investment specialist with Stewart Investors. He joined the team in July 2019. As part of the Impact, Communication and Engagement team, Pablo works closely with the investment team to understand and communicate our investment philosophy and to support our corporate engagement and stewardship activities.

He is also the co-founder and managing director of Altiorem, a not-for-profit library and resource centre dedicated to supporting advocates for a sustainable financial system.

Previously, Pablo was head of responsible investment Asia Pacific at Colonial First State Global Asset Management (now First Sentier Investors) and Perpetual Limited. He served as a director of the Responsible Investment Association of Australasia for ten years and was chair for six. Pablo has also served on the management committee of the Investor Group on Climate Change, the coordinating working group of the Australian Sustainable Finance Initiative, and as a member of the advisory committee to UNSW’s Human Rights Institute, among other industry initiatives.

Pablo has a graduate certificate in sustainability from the Harvard Extension School and is a Graduate of the Australian Institute of Company Directors.

To provide insights into greenwashing, and how investors can spot it, how they can test company claims, and whether ESG ratings are a useful tool for investors in assessing this, Tim Langdon, publisher of Eco Voice, had the pleasure of facilitating a Q & A with Pablo Berrutti, Senior Investment Specialist, Stewart Investors.

Q1. What is greenwashing?

Greenwashing is the act of making sustainability related claims that are overstated, untrue or distract from more important sustainability concerns. Other relevant terms include ‘greenwishing’ and ‘greenhushing’.

Greenwishing is lessor known but arguably more pernicious. It is where companies or individuals engage in sustainability efforts for the right reasons, but it is wholly inadequate to address the scale and urgency of the problems. It is a form of magical or wishful thinking.

Greenhushing has risen to prominence recently following the “ESG backlash” and regulatory focus on greenwashing. It is where organisations downplay or hide their sustainability efforts to avoid criticism.

Q2. Why is it important to avoid greenwashing when investing?

It’s both illegal (misleading and deceptive conduct) and unethical, but there is a spectrum. For as long as there has been marketing, companies have tried to build brands around an often-intangible ethos, even where the realities may conflict. Such examples include advertisements with young healthy people drinking soft drinks even though sugar causes diabetes or adventurous country drivers of SUVs, even though they are mostly used in cities.

Sustainability efforts are necessarily aspirational, recognising the need for change and the desire to improve and innovate. These more qualitative motivations have clashed with the demand to evidence outcomes because the sustainability of a product or service has become its own selling point. This growing reality lifts the bar on what information companies need to provide to support their claims and it is important that companies stay ahead of that.

Q3. How can investors spot greenwashing?

Sustainability issues are complex and interrelated. There is genuine room for different perspectives and therefore confusion, but most people can spot greenwashing by asking four simple questions.

Firstly, does the claim show a clear link to a sustainability issue rather than vague references? Even climate change can be vague, are they talking about emissions? Supply chains? Adapting to increasing physical risks?

Secondly, are the efforts meaningful and relevant to the company’s business or is it more corporate philanthropy? This can be evidenced in a company’s product strategy, revenues, capital expenditure, and research & development (R&D), as well as other factors like procurement practices.

Thirdly, can the company demonstrate (acknowledging that not everything valuable is measurable) that the efforts are making a real world difference? This can include metrics for things like water, carbon and diversity, but also through case studies and investments. The danger with focusing on a few narrow measures is the risk of perverse impacts, unintended consequences and missing opportunities through myopia. The question is whether the company has built a holistic picture that supports the claims with credible and verifiable evidence.

Lastly, is the company balanced and open in how it presents information? For example, even if it were true, a fossil fuel company making the claim that a hundred million dollars of R&D is going to new sustainable biofuels would be greenwashing if they hide that 100 times that amount is spent on extracting fossil fuels.

Q4. Why is credible Environmental, Social, Governance (ESG) reporting important?

Different stakeholders have different needs. As investors we are concerned with the risks, opportunities and integrity of the companies we invest in, particularly over the long term. Good quality sustainability reporting is not only about data but explaining the strategy and plans to evolve their business in line with the demands of a sustainable economy. The changes are significant and urgent and consequently central to the prospects of most companies. Being able to credibly tell this story and then provide information and data to support this is critical for investors to assess whether companies will thrive and survive in the future.

Other stakeholders, like employees, communities, customers and suppliers have different yet equally important needs for information on these issues. Taking a one-size fits all approach risks creating misunderstandings between stakeholders while changing the story to suit an audience can undermine credibility. For this reason, good ESG reporting needs to act as the foundation from which relevant and timely information is provided to key stakeholders. Not seen this way, companies are at very high risk of greenwashing.

Q5. What are some of the issues to look out for when testing company claims?

There are many, but using the four questions early is a good start. Red flags should arise where companies provide only positive stories, or the positive side of a story, or where they emphasise less relevant but positive information over more relevant negative, or neutral information, or where there is no evidence provided for the claims being made. There are many others too. Investors aren’t starting from scratch. Accounting practices have been developed over hundreds of years yet are still regularly abused to help companies artificially boost profits or look more resilient than they are, investors need to apply the same care with sustainability claims as they would to financial accounts. There is no way to remove the grey space, but we can get better at validating what occurs in it.

Q6. How can the investment community reduce greenwashing?

Investors need to start with their investment beliefs, philosophy and process and build their sustainability strategies and communications from there. Bolting on initiatives or adding an external data provider that is inconsistent with the philosophy and process won’t work and will expose them to charges of greenwashing. We also need to be more open about the challenges and the limits of what investors can do and work hard to be clear in how we communicate our goals, the actions we are taking and the outcomes achieved.

One of the largest causes of confusion for the public is misalignment between the financial and social reasons for investing sustainably as they can overlap, but not completely. Timeframes and investment beliefs are very important. At Stewart Investors we only invest in high-quality companies that we believe are contributing to and benefiting from sustainable development because our experience tells us that this will drive long-term returns and reduce risk for our clients. We can take that approach because we have a long-term investment horizon and don’t feel compelled to invest in companies we believe are detracting from sustainable development. Sustainability is not a marginal consideration for us, it is core to what we believe. This is not a nice to have because the challenges and opportunities presented by social and environmental issues are immense.

Q7. How can publications, such as Eco Voice, play their part in promoting sustainability?

The sustainability challenges the world faces are urgent, complex and interrelated. While there are clearly bad actors that need to be called out, many are struggling with the nature of the issues and what it means for their businesses. Sustainability is hard. This is not an excuse for greenwashing, but nor does an obsessive focus on greenwashing encourage the creativity and ambition this point in history demands. We need to encourage a break with business as usual and traditional short-term, linear mindsets which means accepting things will not always go as planned. Where companies are open and genuine in their efforts and share their failures as well as successes, we must learn from, rather than condemn them when they fall short. Publications like Eco Voice can play a key role in building understanding of these realities. We have a lot of work to do.

ABOUT ECO VOICE

First published in 2003, Eco Voice is your go-to publication for sustainability news in Australia. Eco Voice prides itself as an independent news platform with a clear focus on sustainability, with articles coming from a diverse range of contributors – all levels of government, corporations, not-for-profits, community groups, small to medium sized businesses, universities, research organisations, together with input from international sources. Eco Voice values community, conservation and commerce. Eco Voice is a media partner of the prestigious Australian Banksia Sustainability Awards – The Peak Sustainability Awards.

Stewart Investors

Stewart Investors, with more than $19 billion in assets under management as of June 30, 2024, is an active, long-only equity manager and global leader in sustainable investing. It manages a range of worldwide, emerging markets and regional strategies on behalf of institutional and individual clients globally. Based in Edinburgh, the firm also has offices in London, Singapore, New York and Sydney. For more information, please visit: www.stewartinvestors.com.