Understanding investors’ caution around ‘Khaki Finance’

As delegates sit down to the second week of climate talks in Egypt for COP27, money was on the mind and lips of many world leaders last week. Reparations, loss and damage took precedence in negotiations last week, over how the world limits the decline of habitats and the environment. Albeit, they’re not talking about a green transition and how markets can aid or abet the much-needed drive towards net zero, that’s been on our minds here at The Wisdom Council.

Polluting industries could be classed as Khaki Finance

Looking back over the past year, attention has definitely shifted in the media and the general public when it comes to sustainable finance. The war in Ukraine, the subsequent cost of living crisis and market turmoil in recent months has certainly been a distraction from what should be a clear focus on Net Zero. That said, from our social listening we can see that ahead of this year’s conference online audiences are more engaged and discussing ESG and sustainable finance much more than they did – both ahead of and during COP26.

Pursuing Khaki finance

Mindful of an ever more ESG-literate public, ahead of the conference, we asked our always-on community, The Wise Society, about their views on ESG funds, and in particular ‘Khaki Finance’ – the greening of previously ‘grey’ industries. Rather than backing green companies solely, ‘Khaki Finance’ looks at the clean endeavours of previously highly polluting industries, something which the FT described as:

“Some of the most interesting investment opportunities to withstand a high-inflation regime.”

Huw Van Steenis, The Financial Times, 18 July 2022

We agree with recent SDR announcements by the FCA that consumers need clarity when it comes to the green credentials of funds, and the Financial Services sector cannot get away with greenwashing its clients into thinking a transition is coming.

Some members liked the idea of an investment that is transparent and realistic in explaining its ESG credentials, hoping to receive more information about Khaki transitions.

“I think it's probably more honest than Green because they say they are serving to transition but admit to not being there yet. I would be happy to invest a little to support the ongoing progression toward green investments.”

TWS Member

The negatives of greening ‘grey’ industries

Other members viewed it in negative terms, finding it difficult to move past the idea that the term ‘Khaki’ could be used as a cover for companies with poor ESG credentials, allowing them to market themselves to ESG-conscious investors. Criticism came from members across the ESG spectrum, from non-believers to committed responsible investors.

This demonstrated that concerns of greenwashing are so widespread that providers must tread very carefully.

“I think they will say anything to drum up extra customers and this is just another way/gimmick of doing that, if I thought it’d be of benefit from it then I’d look into it more”

TWS Member

This cynicism may not be totally misplaced given this month’s reporting from Climate Trace that greenhouse gas emissions could be three times higher than what oil and gas companies are reporting. Founding member of the Climate Trace Coalition, Al Gore, said:

Any labelling system needs to inspire consumer confidence and it can only do that if it provides clarity and reassurance. The words that we choose for the labels and how we define them will need to do a lot of heavy lifting – for both investors and their advisers.

Dawn Hyams, our Head of Investor Insight and Governance

Our Responsible Investment Research

Our 2021 Responsible Investment Research showed the need to tailor communications to different segments depending on their attitudes towards ESG funds. Our testing showed that the right communications could shift key segments’ thinking, something which we’ve done in practice with our work with M&G.

Get in touch to find out more about how we can help you understand your target market’s attitudes to responsible investment.

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