As regulators crack down on greenwashing, investors would like more clarity on managers’ ESG policies
Over the years, as ESG became increasingly more popular and mainstream, concerns about asset managers making misleading claims about the extent their funds contribute to a more sustainable world continued to grow as well. But it’s only very recently that regulators and other organisations have started taking more serious actions to crack down on this so-called greenwashing.
In February, Morningstar cut over 1,600 funds with a combined $1.2trn in assets from its European sustainable investment list after it found ‘ambiguous ESG language’ in the funds’ legal documents. The data and ratings provider didn’t mention any names of funds that had been cut, but it was later revealed Fundsmith was one of them.
The move has resulted in Morningstar now only recognising 4,461 European funds, with combined assets of $2.23trn, as sustainable, compared to the 6,659 classified, with assets of $4.6trn, under rules by the European Union’s Sustainable Finance Disclosure Regulation (SFDR). At the end of December 2021, 42.4% of total Europe fund assets were in sustainable funds recognised by the SFDR.
In the same month, the European Securities and Markets Authority (ESMA) published its Sustainable Finance Roadmap 2022-2024, identifying ‘Tackling greenwashing and promoting transparency’ as one of three priorities for its sustainable finance work in the coming years.
This follows moves by other European financial regulators who have been uncovering more cases of greenwashing. Regulators in France, the UK, Sweden, the Netherlands and Switzerland have found a number of instances where asset managers failed to proof the ESG claims they were making, Reuters reported in November.
The increased focus on greenwashing is a welcome move, eagerly awaited not only by investors but by asset managers as well. A recent study by the Independent Investment Management Initiative (IIMI) found that 88% of its members believe that the fund management industry has a problem with greenwashing.
While the interest in ESG continues to grow, both investors and asset managers are being hindered by a lack of clear definitions and harmonisation in how the industry approaches ESG. The IIMI found that 81% of their members would like to see more standardisation in ESG reporting globally. More legal guidance on ESG definitions and best practice and a crackdown on greenwashing will benefit both investors and genuine ESG fund managers.
Research by Fundamental Media confirms these ESG challenges. While 72% of financial intermediaries in Europe are applying ESG criteria in their selection process, only 42% feels there is enough information available on ESG. Furthermore, 38% don’t consider ESG ratings to be reliable, although 64% believe asset managers understand ESG.
So what can asset managers do to ensure that their clients and prospects trust their ESG products and credentials?
Research by Chestnut Advisory Group found that 63% of institutional investor respondents said they’re “just getting started” in their overall ESG efforts, compared to 13% of asset managers. This is a strong indicator that institutional investors are following their asset managers’ lead when it comes to ESG. As a trusted source of information for many investors, asset managers need to communicate honestly and clearly.
Our own research found that financial intermediaries would like to see more clarity on asset managers’ ESG policies as well as more standardisation and transparency.
While regulators try to formalise definitions and best practice, asset managers can already ensure their clients and prospects better understand their ESG policy and screening process. By being transparent and communicating clearly with their audiences, asset managers can ensure that their investors know how their investments are benefitting the planet and its inhabitants.