Aalto University's Professor Vesa Puttonen has raised critical concerns about the rapidly growing trend in the financial world: Environmental, Social, and Governance (ESG) investing. In an era where the urgency of the climate crisis is undebatable, Puttonen voices a cautious critique of what has become the fastest-growing financing trend globally.
Responsible investing, driven by ESG principles, has seen unparalleled growth in recent years.
The demand for sustainable investment options has consistently outstripped supply, indicating a robust market appetite. However, as the window to address or mitigate climate change narrows, the stakes for getting ESG right are higher than ever.
In an interview with Aalto Leaders’ Insight, a magazine for customers and stakeholders of Aalto EE, Puttonen warns of the existential risk of climate change, emphasizing the one-shot nature of our current situation. "If we mess this up, there won't be a second chance," he asserts, highlighting the critical importance of the current efforts in sustainable financing.
Puttonen's critique centers around the concern that the term 'responsible' has become an ambiguous sales pitch that can be misapplied in various contexts if packaged correctly. He worries that this could lead to greenwashing, where the essence of sustainability is diluted or misrepresented.
Another area of concern for Puttonen is the exaggeration of profit promises in ESG investments. While green transition and sustainability present massive business opportunities, the lure of cheaper and more accessible funding for green projects can tempt companies to stretch the truth about their sustainability credentials.
The risks of greenwashing have been recognized in the finance industry and regulatory bodies. The European Securities and Markets Authority (ESMA) has called for high-quality sustainability reporting. Starting in 2024, the EU's sustainability reporting directive will enforce stricter and more uniform reporting standards for non-financial corporate information.
Regarding profit promises, Puttonen notes a shift in the narrative. Previously, sustainable investments were marketed as offering higher returns than other investment options. "The excess returns are real, but they are a thing of the past," he explains.
Puttonen challenges the prevailing narrative in the financial sector that suggests sustainable investing yields higher returns with lower risks while simultaneously improving the world. "I'm playing the role of a dampener for a moment: it's too good to be true," he concludes, urging a more realistic and cautious approach to responsible investing.