How Investors Can Hold Companies Accountable for Greenwashing

How Investors Can Hold Companies Accountable for Greenwashing


Bocconi graduate Davide Serra founded Algebris Investments, an independent asset management group with $18 billion under management, in 2006. Serra’s investor activism has earned him an international reputation. Algebris has joined the Task Force on Climate-Related Financial Disclosures, CDP, and the Say on Climate campaign founded by Sir Chris Hohn of the Children’s Investment Fund Foundation. As a member of the Net Zero Asset Managers Initiative from 2021, Algebris is committing to reach net zero carbon emissions in investee companies by 2050. Serra will launch a private equity fund focusing on C02 reduction this year, led by Valerio Camerano. And he is planting one million trees in the next three years.

Personally, did you have an “aha!” moment when you realized the importance of climate change?
One “aha!” moment was about eight years ago at an event in Miami where I met the former US vice president Al Gore. He gave a talk, and from that day I studied the science behind it, and started engaging.

What do you look for in ESG investing today? What guides you?
Eighty percent of our portfolio is invested in banks and insurers. We see banks and insurance as the gatekeepers of transition to a greener and more sustainable economy because of the key role they play in lending. We look at C02 emissions and exclude any company that has significant investments in coal-related industries. There is still very little disclosure on bank lending, particularly on anything that has to do with carbon fossil fuel lending and assets.

ESG investing is undergoing a boom. How do you figure out if a company is greenwashing?
The most important thing is to have a clear standard for disclosing C02 emissions. It’s as simple as that. Right now, this is what we don’t have. Most companies are bullshitting about what they are going to do in 2050, and by then we will already all be dead! What we need is full C02 disclosure.

How can C02 emissions disclosure be improved?
Right now there are Scope 1, 2, and 3 emissions categories. Disclosure of these emissions needs to be mandatory so that investors can gauge a company’s C02 reduction plan. Publish it, and then people can do their homework. And mainstream finance will walk away from polluters, creating a competitive disadvantage. Until you provide that disclosure, this can’t happen.

How can companies be held accountable for their C02 emissions?
In 2020 we joined Sir Chris Hohn’s Say on Climate Initiative. This year we will send every company in our portfolio a letter asking for the board to present a climate transition action plan at the AGM. The board needs to tell investors how the company will get to net zero carbon emissions in 2050. We can put pressure on them as a shareholder. And put pressure on other shareholders.

How can greenwashing be stopped?
To be honest, the same thing that happened with the triple A rating debacle in the United States during the financial crisis is still happening with greenwashing. That’s why “bottom up” activity is important.

Can this ratings system be improved? How?
There is a fundamental flaw in ratings agencies. Each investor needs to do their own job. I never looked at ratings and I never will. That’s why we prefer to work with NGOs. They are the ones who dig out the dirt. They are not paid. All the best global data are all funded by private sector people like us to get a better picture, particularly on banks and insurance. Deal by deal, loan by loan.

How can non-financial disclosure be improved?
Make sure that the full C02 impact Scope 1, 2, and 3 is published, and benchmarked both against the sector and against absolute metrics. That way I can know how much I am polluting when I invest in a unit or dollar of profit. Make sure that the total C02 emissions are disclosed, so you can have a clear idea of total and how the company plans to shrink emissions. Moreover, 80% of C02 emissions happens in cities. So it should be done on a city by city level. Mayors should be doing it.

What is your view of the EU’s new Taxonomy Regulation for ESG investing? Is it important? What will it mean for you as an investor?
The EU is at the forefront on ESG regulation. The Taxonomy is very welcome. As an investor, we try to exclude any bank or financial institution that has a significant role in funding fossil fuels. Hopefully the Taxonomy will make our life easier because it will kind of standardize this disclosure and provide more easily accessible data, which ultimately is what we need to allocate capital. It will mitigate the weakness that currently exists in the ESG data industry. In the meantime, in 2021 we will ask all our investee banks to report the carbon intensity of their corporate loan book, where they have the data, in a manner consistent with the Partnership for Carbon Accounting Financials (PCAF) framework. We will also ask them to report a strategy for (1) increasing the nominal value of loans whose emissions are disclosed and (2) achieving annual reductions of the carbon intensity of their loan book and underwriting.

Is it important to tie executive compensation to ESG criteria?
I wouldn’t link pay to anything but performance. But in my view the science of climate change is strong enough to warrant a net zero transition as part of compensation.

Specifically, what is the commitment of Algebris?
In February we announced the launch of a dedicated unit led by Valerio Camerano to invest in companies that reduce C02. For the time being, though, I have been offsetting for the past 15 years. The simplest, scalable way to do carbon capture is to plant trees. Each tree absorbs one ton of C02 over a lifetime. For the next 3 years we will be planting 1 million trees. And this is going to be my contribution. The message I would give to everyone is if you can’t to be C02 neutral, you should plant 5 trees every year. Each year. Per person.

What in your mind is an impediment to a greener future?
It’s not regulatory, it’s economic interest. Russia, the U.S. and Saudi Arabia are aligned to have us keep using fossil fuels. It is only a question of money. Anything else is just hypocrisy.

by Jennifer Clark

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