The Role of Perceived Value and ESG Metrics in Financial Products and the Pitfall of Greenwashing

Reference: Sustainable Finance: A Primer and Recent Developments by Alex Nicholls

The value of any financial product is fundamentally determined by its perceived value to potential willing investors. In other words, the worth of a financial product is contingent upon the needs, objectives, and risk tolerance of the individual or institution considering it.

At its core, sustainable finance is grounded in environmental and social awareness principles. In the context of portfolio construction, fund companies commonly depend on internal ESG metrics that have been established by the fund itself as a means of gauging a company's eligibility and its potential value to the portfolio.

However, it is crucial to note that the effects of ESG activities may not be immediately apparent. As a result, some large and prosperous corporations have devoted significant sums of money to activities that ostensibly enhance their metrics but do not yield meaningful results. These activities are often called "greenwashing," and may not genuinely reflect a company's commitment to sustainability.

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