The director of ESG at the Financial Conduct Authority even covered it in his keynote speech at Good Money Week, and indeed the FCA has just issued its consultation on a package of measures to tackle greenwashing.
In a bid to clamp down on greenwashing, the FCA today (October 25) proposed measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used.
The US SEC recently fined an asset manager for falsely implying that some of its funds had undergone so-called ESG quality reviews.
It seems clear that greenwashing is a big issue.
ut what exactly is it, why is it so important, and what can be done to combat it while we wait for the FCA's proposals, which they intend to publish by the end of the first half of 2023?
Trust in financial products, services and advice is essential.Greenwashing is not a new phenomenon. It was first identified in the 1960s, with the name arising in 1986 (in relation to an oil company - imagine that).
The FCA defines greenwashing as:
- "Marketing that portrays an organisation's products, activities or policies as producing positive environmental outcomes when this is not the case.
- "Making claims that could confuse or mislead a client, and possibly their adviser, seem unwise given the recent history of mis-selling scandals, yet the phenomenon persists."
It seems fair to assume that a fund labelled 'ESG Climate Change' would be unlikely to hold oil majors in its Top 10, and I believe advisers and investors are likely to feel the same.
Whether or not this fits a strict definition of greenwash, this genuine example strikes me as likely to confuse anyone seeking sustainable investments.
This is not to suggest that funds that invest into fossil fuels (or armaments or tobacco to include other sustainability issues) are the problem; it is those that present a marketing face to the world through the name of the fund, that do not align with an informed view of the underlying holdings.
Wishy-washy statements
The phenomenon is not confined to fund names.
There are asset managers that state on their website that "the importance of ESG factors is core to our investment process, therefore our entire MPS offering is ESG-focused in line with our ESG policy."
Or: "We invest in companies that are not only current sustainability ‘leaders' but also companies that are looking to improve their ESG impact."
Yet, within their fund's holdings one finds tobacco manufacturers, a major global arms manufacturer, and fossil fuel companies.
Transparency is an essential component of building and maintaining trust.However, the manager is not breaching their stated investment process, so is this greenwashing?
This brings me to the issue of meaningless statements attached to funds, such as "ESG is integral to everything that we do" or "We are aligned with a transition/positive/impact pathway".
Such statements tell you nothing informative about the funds' approach to ESG or environmentally sustainable investment.
Equally unhelpful are jargon-laden statements such as "our ESG strategy also includes an avoidance of controversial weapons".
Why unhelpful you might wonder?
All weapons are controversial to someone, so knowing that 'controversial weapons' refer to weapons of mass destruction, cluster munitions, land mines (and others, depending on whose definition you follow) is specialist knowledge.
How to interpret jargon
How is a non-specialist IFA or investor supposed to interpret such a statement?
If investors are being misled, particularly in relation to strongly held views, this undermines trust in their advisers and the asset manager and their offerings.
Trust in financial products, services and advice is essential, so it is unsurprising that the FCA and other global regulators are paying such close attention. As an adviser, how is it possible to minimise or eliminate the impact of greenwashing?
Some fund managers make it very easy to ensure holdings align with the views of an investor - they list all of their fund holdings with a description of the activities in which each engages.
For funds which only provide a top 10 holdings list, you can ask managers for a full list and a breakdown of areas that might
cause concern to an investor.
Transparency is an essential component of building and maintaining trust, and fund managers need to be proud of where they invest.
If that includes fossil fuels, they should be able make the case to explain why, and not hide behind such meaningless statements as those previously outlined.
If an adviser is constructing a bespoke offering for a client, this information, alongside fund selection tools, will make it possible, whether that be environmentally focussed or driven by a range of sustainability or ethical avoidance issues.
An adviser could decide to adopt a house view, which combines avoidance of controversial and unsustainable activities, and encouragement of positive impacts that will appeal to the majority of clients.
This can simplify the process and, by focussing in this manner, enable the adviser to have greater knowledge of the offering and engage more fully with both managers and clients.
Where avoidance is required, funds that apply some form of negative screen make the selection process easy.
Many investors, however, seek a combination of both positive and negative, so the process must be adapted to accommodate this.
Possible solutions
One solution is to select funds with overtly positive or environmental themes.
It will depend upon the particular negative issues that concern an investor, but a water or forestry fund is unlikely to invest into gambling or armaments.
The easy solution once again is simply to ask the manager whether the positive themed fund has any exposure to the issue of concern (tobacco/fossil fuels/child labour etc.)
If the manager is unwilling or unable to answer it should be a source of concern to both you and them.
With a managed portfolio service, the manager should find it very easy to inform advisers and investors of areas that might prove to be concerning.
Funds that apply some form of negative screen make the selection process easy.It is my belief that this should be provided as an integral part of the offering - you should not have to request it.
Providing a full list of holdings does not help you if that list comprises only a breakdown of the underlying funds, and does not cover any potentially contentious companies held within those funds.
Clients are smart and deserve to know where their money is invested, so the message to fund managers is clear: if you claim to be helping clients invest in companies contributing to a better world, be proud of where you invest and the processes that you follow to select investments; and be prepared to share that process with clients.
As complicated as all this might sound, greenwash is actually very easy to avoid.
You need to be completely transparent and honest; do not making claims that are likely to confuse or mislead; provide investors and their advisers with complete clarity; and trust them to make decisions that align with their best interests.
Problem solved.
