Despite growing demand for environmental, social and governance investments, the market lacks definitions, frameworks and asset classes that cater to investors' needs and divert money to the right place, according to market participants.
Institutional investors have increasingly been applying ESG criteria to their investment policies, with a view to reducing financial risk and providing better returns over the longer term. ESG-related funds have mushroomed, as has the issuance of green and social bonds, debt that finances environmentally friendly and socially aware projects.
According to the Global Sustainable Investment Alliance, sustainable investments stood at €30.7 trillion in early 2018, a 34% rise over two years. Meanwhile, the Climate Bonds Initiative predicts that the green bond market in Europe will expand to $102.03 billion in 2019 from $67.18 billion in 2018.
But while interest abounds, opportunities are lacking because the fast-growing range of products on the market does not always match investors' needs.
In addition to worries about greenwashing, where an investment product may not be as ESG-positive as marketed, investors are concerned they cannot buy what they want.
"There is a proliferation of products and it's sometimes hard as an investor to separate greenwashing from a well-considered process," Catherine Banat, managing director for responsible investing at RBC Global Asset Management (U.S.) Inc., said in an interview.
"Different investors want different things, so often they want something specific that doesn't exist," she said.
One of the challenges for the market is defining ESG, because what investors call ESG may differ from person to person.
Ben Yeoh, a senior portfolio manager at RBC Global Asset Management, said there is a mismatch between headline figures for sustainable investment and people's experience on the ground. One investor may be at ease with investing in a gun producer, while another may not, but the second investor might agree to investing in a tobacco producer.
A classification system, such as the green classification system, or taxonomy, being developed by the European Commission, will help define ESG, he said, while Banat said there was a push from investors on managers to create the investment products they want.
In a research report, NN Investment Partners Holdings N.V. found that 46% of investors believe investment opportunities need to increase for responsible investing to become mainstream, and 44% say there is a lack of research and information about responsible investing. NN also found that 64% of investors find it difficult to differentiate between green financial products.
An RBC Global Asset Management study notes that "uncertainty appears to be on the rise" from investors who do not yet have a strong ESG investment approach. The proportion of those who are unsure about the ability of an investment portfolio with ESG factors integrated to mitigate risk has risen to 24% from 18% in 2018, for example.
There is also a lot more scrutiny of green investments, with investors looking in depth at what a bank may be financing, for example.
"People are digging deeper on the investment side," said Bruno Bastit, senior corporate governance and sustainable finance specialist at S&P Global Ratings. Investors are looking more closely at projects that banks are financing and underwriting, mostly because investment managers are under pressure from asset owners to do more, he said.
"There is a lot more scrutiny as to what financial markets are doing and a clear move from everybody and every single actor to dig a lot deeper into this issue," he said.
Daniel Klier, global head of sustainable finance at HSBC Holdings PLC, told a conference in Paris that he also saw a mismatch in sustainable financing, but between where investors' money sits and where their money is needed.
He said governments, international organizations and regulators need to work together to create policy that will allow for the creation of an asset class that would move money from pension funds and insurance companies in the Western world to infrastructure projects in the developing world. Many green projects invest in emerging market projects in local currencies that come attached with significant political risk.
"Unless we create an asset class that is trusted, that is liquid, we will not mobilize the money," he said.
For debt investors, one solution may be an ESG assessment for all bonds, because the opaqueness of the green bond market and the lack of supply make it difficult for asset owners to invest in them, said Richard Mattison, CEO of Trucost, part of S&P Global.
"There is a danger ... that if you ring fence something too much you don't create sufficient investability from large asset owners," he said.