Greenwashing is of growing concern in the realm of sustainable investments. About half of all funds promising to be climate friendly, do not align with the Paris agreement. Most of these funds are based on relatively weak data and poorly defined environmental, societal and governance (ESG) factors. This, for instance, allows many traditional energy companies or tobacco firms to be included in ESG funds of for example BlackRock and UBS. It is no wonder that many call for clear standards and more stringent enforcement of regulation. In response, the EU is working on well-defined concepts and developing standards for benchmarking and reporting on the societal impact of a fund and/or company..
Yet, there is also a risk that strict regulation steers sustainable investments towards products with relatively easy-to-quantify outcomes. This will likely result in a strong focus on companies and incremental solutions that bring about a measurable, yet fundamentally limited, improvement over the status quo. More radical and transformative solutions, which are eventually necessary to develop a fully sustainable economy, may be left behind because they lack clearly defined metrics or because the companies supplying them are less equipped to produce the kind of data regulators and customers are looking for.