As more money flows into ESG, what can be done to prevent greenwashing?
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At first glance, an ESG funds may seem like a no-brainer, but how can investors know they’re really getting an ESG fund and the fund is not greenwashing?
According to the RIAA, responsible investing now makes up over a third of Australian assets under management – managed by professional fund managers. And globally, Morningstar has estimated investments in “sustainable funds” were more than twice as high in 2020 than in 2019.
But it is difficult for investors, particularly retail, to measure how their funds are performing on an ESG basis even when they’ve outlined their principles and what metrics are most important.
And of course, no two fund managers will have the same principles and metrics.
The rise of ESG investing and ESG funds as well as the lack of clear benchmarks has led to concerns in the investment community that some firms may be “greenwashing”, making their funds look more ESG-friendly than they actually are.
ASIC Commissioner Cathie Armour last week warned at a Minerals Council of Australia forum that the current focus on climate change and the lack of standardised disclosures might provide the chance for greenwashing.
And this isn’t just an Australian concern or even just shared by corporate watchdogs.
UK wealth management firm Quilter found last month that 44 per cent of investors are concerned that ESG investments aren’t what they claim to be.
In releasing the research, Quilter’s head of responsible investment Eimear Toomey declared that greenwashing threatened to undo all the progress made in responsible investing.
“It is crucial that fund groups invest in the way that they say they will, so it is important investors hold them to account on this,” she said.
It’s easy to suggest greenwashing by ESG fundies can be stopped by requiring market participants to adopt benchmarks but it’s difficult to suggest what exactly should be adopted.
Stoic Ventures managing partner Geoff Waring suggests Europe might be a place to look.
In March, the EU introduced the Sustainable Finance Disclosure Regulation (SFDR) which will be gradually phased in until the end of 2022.
Among other things it mandates that financial market participants and advisers must:
Stoic’s Dr Waring also noted Europe have associations with guidelines on how to best report these ESG issues.
“I guess if we’re looking to do those sort of things we could pick them up,” he said.
“It [greenwashing] is really a global issue that hasn’t been addressed, because if you want to benchmark on what your companies have – there’s no benchmark out there.
“There is [a benchmark] with financial returns, you can do it by sector, but there’s no degree of normalisation with ESG metrics.”