You could be forgiven for thinking that by now almost all investment funds are sustainable. Just look at the inflow into funds, the adverts for asset managers or the European legislation: everything is shrouded in a green haze.

And that is also the biggest problem. That green haze appears to be going to the brain, which makes it hard to think clearly about exactly what it is that makes those financial products labelled as being sustainable.

Most people probably assume that a green investment product will make the future a little more sustainable. At least that is what the websites of many providers promise us, with ranting texts such as ‘investing for a better world’ or ‘investing for tomorrow’. But nothing could be further from the truth. Supposedly sustainable investing often amounts to nothing more than avoidance of sustainability risks. In a world where risks associated with ecological or social problems are getting more material, this is a logical idea, and it also aligns with the European Commission's definition of sustainable finance. Consequently, most sustainable funds (except for the 5% that are designated as impact, or article 9 funds) are currently only required to demonstrate how they exclude sustainability risks, not what they do to bring us closer to a sustainable world. And very often that is in fact nothing. I have never seen risk managers accelerating anything, let alone a sustainability transition.

But it is even worse than that. Because the avoidance of those sustainability risks is mainly based on promises made by companies that they will do things better in the future, especially with regard to climate-related issues. For instance, you could buy an investment fund that according to its prospectus is fully aligned with the Paris Climate Agreement, but still invests in the biggest oil producers. Because these companies promise that they will produce with net zero emissions by 2050 and can prove that their emissions are diminishing. So even though not a single euro goes towards funding climate solutions and while these investments currently only contribute to more global warming, we still call this sustainable investing.

Indeed, a fund that does try to finance solutions for countering climate change often finds it harder to qualify as Paris-aligned because its emissions are already low to start with, so fewer empty promises are (or need to be) made. Thus we get the awkward situation that Paris-aligned investments equals investing in the devastation of the planet, while investing in solutions seems to be less sustainable.

It is like making plans with your neighbours to tidy up your street and the neighbours then only taking out their own rubbish because they know that the rubbish truck will come round to collect it at the end of the day. Agreed, this is an absurd comparison, but this whole situation is absurd. And so, as we have seen many times before, abstaining from bad behaviour is rewarded more than good behaviour. So why bother behaving at all?

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published10 January 2023.