How to do ESG due diligence and avoid greenwashing in portfolios

This article is part of
A guide to ESG and responsible investing

Mr Bragazza's approach is to focus on providers that have had ESG portfolio offerings for many years, including periods of time when the asset class was less fashionable than is presently the case, with the result being that he can be sure that the focus on ESG is genuine.  

Peter Michaelis, head of the sustainable investment team at Liontrust, says there is a danger that the rise in the number of providers bringing ESG products to market increases the risk of greenwashed investment portfolios. 

He says: “We hope the financial services industry maintains high standards in meeting this demand and is clear and transparent to investors about the sustainable products they offer. Greenwashing is a troubling trend.

"Therefore, we expect ever-closer scrutiny of sustainable funds to evaluate if they deliver what they say they will and a growing demand for transparency. This will lead to improved reporting of the impact of funds and their engagement.”

Ama Seery, sustainability analyst at Janus Henderson investors says greenwashing is more often the result of lack of knowledge than of any attempt at malfeasance.

She says: “There are professional qualifications in sustainability, just as there are in finance, but not many people in the finance industry seem to have the sustainability qualifications. To be an analyst at a fund house you need to be a CFA, but to work on a sustainability fund you aren’t required to have a chartered environmentalist qualification.

"Companies report carbon in different ways, and in ways that downplay the negatives, there is a greater sophistication, but the qualifications to identify that aren’t really valued by the industry.”

Money matters        

For David Harrison, fund manager on the Rathbones Global Sustainability fund, the companies that interest him are those that can show a link between the ESG policies being pursued and the financial returns to be earned.

Additionally, company management must be able to articulate how the ESG policies help the financial performance of the company. If they can do this, he will know they are committed to implementing stated ESG policies.

Mr Harrison says that if there are specific ESG targets, such as compliance with UN Sustainable Development Goals, one of the questions he asks is whether the remuneration of the business’s senior management is linked to the achievement of those goals, in a similar way it could be linked to meeting specific financial goals.