ESG Investing  

How can advisers insulate themselves and clients from greenwashing?

This article is part of
Guide to ESG and regulation

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:

  • Choose funds that describe sustainability goals and understand how they integrate ESG considerations into their investment process.
  • Look at the leadership team of the companies you are considering investing in. How diverse are they? Look at the salary data. Research if there has been a recent scandal in the companies’ supply chain.
  • Look at how the company is structured and what expertise it has on-board to execute on the ESG goals it has advertised. 
  • Know what is in the ESG funds and understand how the fund is really implementing ESG principles.
  • Look past buzzwords and trends.
  • Be responsive to new discoveries and changes.

Medlock also suggests advisers consider the following when trying to sort the wheat from the chaff:

  • Are they signatories to any codes and initiatives? What is their UN PRI rating?
  • How are any exclusions applied and is this clearly stated?
  • Does the fund manager evidence their engagement and stewardship activities and the outcomes of these? 
  • What ESG integration techniques are applied?
  • What resources and support are available to the fund managers and analysts? 
  • What is their longevity in the sustainable space?

Clearing up jargon

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