Greenwashing has become a challenge for environmental, social and corporate governance (ESG) investment, says the SCB Chief Investment Office (CIO), which is advising investors to consider ESG ratings before allocating funds.
Rather than focusing on short-term gains, the investment analysis division of Siam Commercial Bank sees investing in companies with a focus on ESG governance issues as a positive trend.
"Amid rising interest rates and high inflation, younger investors in Gen Y and Gen Z see ESG ratings as a key element affecting their investment decisions, aside from returns on investment," said Kampon Adireksombat, first senior vice-president at SCB CIO.
In terms of risk-adjusted returns, an ESG group outperforms a non-ESG portfolio, said SCB CIO, indicating that ESG investment is a viable choice amid an uncertain global economy.
Overall investment in mutual funds related to ESG is likely to continue to grow, as net assets under management (AUM) of ESG-themed mutual funds increased by an average of nearly 30% per year between 2016 and 2021.
The number of ESG regulations also increased by an average of 41% annually between 2016 and 2020, and by 17% in 2021. Every segment of the private sector, from producers to consumers to financiers to investors, is now more aware of ESG as a result of the new rules.
In Europe, where the EU's Sustainable Finance Disclosure Regulation is in effect, it was discovered that between 2018 and 2021, there were significant investment inflows into funds with rigorous ESG standards.
About 30% of Europe's AUM is invested in ESG mutual funds, making Europe the world's leading zone for this type of mutual fund investing, Mr Kampon said.
But he cautioned that greenwashing, a practice where businesses falsely claim to be in compliance with ESG criteria when they are not, is a threat to ESG growth for investors.
Previously, funds claimed to select companies based on ESG criteria. When this was discovered to be untrue, resulting in the fund being penalised, investors withdrew their money and the stock price of the parent business plummeted dramatically.
Governments in several nations are attempting to regulate and avoid greenwashing, particularly in developed markets, leading investors to pay greater attention to the ESG measurement factor or ESG rating when making new investments.
To avoid greenwashing funds, ESG ratings are becoming increasingly important to investors, said Mr Kampon.