Advisers need to manage end investors’ expectations around ESG to avoid accusations of greenwashing, an expert has said.
Hortense Bioy, global director of sustainability research at Morningstar, said at the firm’s investment conference on June 30 that advisers and asset managers also need to educate end investors around sustainable products.
“Greenwashing can be quite subjective, what one person considers greenwashing might not be what someone else thinks," she said.
“It can often come down to an expectation gap between asset managers and investors.”
Bioy said it could be tricky because there are diverse opinions in the market as to what constitutes a green investment, and so far there is no sector consensus.
She added: “It is certainly tempting for asset managers to overclaim and sell the products they are providing because ESG certainly sells.
“There are many ways to evaluate a fund’s ESG performance,” Bioy added.
“The key is to find the right data points, ratings and scores to answer the questions end investors have.
“Investors need to do their due diligence and ensure they understand the nuances between ESG approaches and the different shades of green.”
Bioy added that investors shouldn’t just rely on a fund’s name, and it was important to understand that sustainable funds varied in their approach.
“Investors will all have their own sustainability preferences and financial constraints. One problem is that investors mean different things when they say sustainable investing,” she said.
“You need to understand your clients' values and expectations and make sure there isn't too big a gap between those and the green characteristics of the portfolios.
“For that, transparency is critical, and disclosure is the best way to combat greenwashing.”
On the benefits of investment managers engaging with businesses in order to help them become more environmentally friendly, Bioy said it could be a good move but more transparency was needed.
“There is a value in engagement, although it is often opaque and it is difficult for the end investors to form a view on the merit of engagement - more transparency is needed in this area,” she said.
“Asset managers needs to disclose more information on the way they vote and engage with companies [around sustainability] so they can be made accountable.”
The government recently created a working group to help it create a green taxonomy in the UK, and avoid greenwashing.
The Green Technical Advisory Group (GTAG) will oversee the delivery of the green taxonomy in the UK, giving advice to the government on developing the framework, supporting investors, consumers and businesses to make green financial decisions and will clamp down on greenwashing.
GTAG will be chaired by the Green Finance Institute, and will be made up of financial and business stakeholders, taxonomy and data experts, as well as subject matter experts from the Environment Agency, the committee on climate change, NGOs and academia.