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Guide to ESG and regulationBut there is also the risk that the terminologies and names used by investments may confuse the client into thinking it is greener than it actually is.
It continues to be a key concern for regulators, governments and industry. For a company, risks emerge in a variety of categories such as strategic, legal, compliance, reputational and even financial.
In 2019, the 2 degrees investing initiative (2DII), a think tank that co-ordinates some of the world’s largest research projects on sustainable finance, revealed that 85 per cent of funds labelled green had misleading marketing.
That number will likely have reduced now due to the regulatory focus and product manufacturers improving the standards of their disclosures, but we are still seeing the headlines and greenwashing in action.
The main risk with greenwashing is that investors end up with a portfolio that does not reflect their ESG preferences, something which fund groups are unlikely to be deliberately engaged in.
Rather, it is the consequence of a lack of clearly agreed definitions on which investors can then base their expectations, combined with a desire for asset managers to 'greenify' their fund ranges.
Laith Khalaf, head of investment analysis at AJ Bell, says the result is that there is probably some market dysfunction which is reflective of the growing pains of a nascent industry, rather than a result of widespread misbehaviour by fund groups.
He adds: “To avoid any accusation of greenwashing, advisers should seek to clearly communicate to customers how a given investment meets their ESG preferences, and indeed where it might not.”
Alix Lebec, chief executive and founder of Lebec Consulting, says at a time when the industry needs ESG to be taken seriously, there is a risk that greenwashing may put every ESG product out there into question.
She adds: “The best way we can insulate is to question the data and go beyond it. ESG data is often self-reported by the companies so it is important to also take into consideration the analysis that follows the data.
“And if there isn’t any, that could very well be a warning sign or a signal to analyse the data yourself and ensure it answers your key questions.”
Ryan Medlock, senior investment development and technical manager at Royal London, says: “All of us within the industry, and particularly the advice community, will need to pay very close attention to this. That means formally including responsible investment considerations within wider research and due diligence processes.
“We know a fund’s name will not always reflect what it actually does from a responsible investment perspective and that’s why it’s important to lift the lid and reach your own conclusion.”
So, how can advisers spot a greenwash when they see one?
Below are some steps Lebec recommends advisers take when keeping an eye out for greenwashing:
Medlock also suggests advisers consider the following when trying to sort the wheat from the chaff:
Mollie Thornton, senior investment manager at Parmenion, says advisers can insulate themselves from the risks of greenwashing by being clear about the jargon involved in this space.
“It can be useful to use a jargon buster document or similar to make sure clients understand the key terms, such as 'net zero' or 'sustainability'."
There is also no shortcut for advisers to research ESG products. They need to understand the ESG mandate and be confident that this meets their clients' needs.
This involves reviewing marketing materials for the product, such as a solution brochure or video, as well as looking at the underlying funds or companies held.
There are external providers of research on ESG funds, for example Sustainalytics and Fund Ecomarket. Other independent providers include ESG Accord, which reviews ESG model portfolio solutions, says Thornton.
While advisers can use these external sources it is important that they understand the methodology and inputs to how these providers rate different products.
Nigel Green, chief executive and founder of DeVere Group, says: “Despite instances of greenwashing, the ESG investment mega-trend continues to grow.
"I would suggest that with some due diligence, investors should not shy away from this investment boom, especially as those investments with robust ESG credentials continue to outperform the market.”
Ima Jackson-Obot is deputy features editor at FTAdviser