Greenwashing: understanding the alphabet of ESG affiliations

How affiliations can illuminate a GP or LP’s commitments to ESG

A fast fashion brand launches a sustainability clothing line, with little or no evidence of its environmental impact. A bank markets itself as addressing climate change yet is a substantial lender to industries that generate the highest levels of greenhouse gases. The list of these greenwashing examples continues to grow.

Even investors with a genuine commitment to ESG improvement risk their initiatives being labeled greenwashing. So, just how can investors and fund managers quickly and reliably understand whether a firm is committed to ESG sustainability, or merely paying lip service? 

There is no single, simple answer, but ESG affiliations, which allow firms to show their commitment to ESG and sustainability can be a guide. Most affiliation bodies require firms to pass a set of criteria, which ensures that firms spend time, effort, and money to uphold the accreditation. 

The requirements of ESG affiliations can range from stringent, committed plans, to simply signaling intent. The differences we will explore in the second of this two-part project. Preqin’s ESG Solutions currently tracks more than 40 affiliations relevant to investors in alternative assets, with more expected to be added.

First, we will look at three different categories of affiliations, broadly targeting the themes of Environment, Social, and Governance. 

Environment
Many affiliations focus on the ‘E’ – environmental. These seek to address things such as reducing greenhouse gas emissions, waste, and consumption of natural resources. To be a member of these affiliations, GPs and LPs support engagement activities and corporate behaviors that address the long-term risks and opportunities associated with climate change in an explicit way, such as implementing climate change policies. They include CDP Climate Change, the Institutional Investors Group on Climate Change, and the network of Net Zero Alliances.

Social 
Those that focus on the ‘S’ – social – are mostly bundled together under the umbrellas of ‘responsible’ or ‘sustainable’ investing. The United Nations Global Compact, which bills itself as “the world’s largest corporate sustainability initiative”, has 10 principles, six of which focus on human and labor rights or business ethics, and four on the environment.

Governance 
The UN PRI (UN Principles for Responsible Investment) is arguably one of the better known affiliations globally. Many of the tenets of PRI relate to improving corporate governance, although environmental and social concerns overlap. They focus on sustainability principles, usually tied to the three ‘p’s: people, planet, and profits. 

There are also specific affiliations that promote and support effective corporate governance practices, such as the International Corporate Governance Network. GPs and LPs with one of these affiliations explicitly and publicly support effective corporate governance, as well as the stewardship policies and practices recommended by these affiliations.

Who’s affiliated, and to what?
As well as the global organizations, there are numerous other affiliations that are focused on specific regions and asset classes. While an abundance of resources and platforms is often a good thing, understanding the landscape becomes more complex from a due diligence perspective. It requires an understanding of which affiliations the target companies, managers, or firms are part of, and of each affiliation’s nature and requirements.

Discover affiliations of GPs or LPs on Preqin Pro’s ESG solutions platform, which offers a one-stop solution for integrating ESG into your investment decision-making. Request a demo today to see how it works.