The market for ESG (Environment, Social, Governance) investing is increasing exponentially. According to recent estimates, ESG funds are believed to manage around $330 billion, and this looks set to keep growing. While positive, the sudden growth of ESG has led to concerns around greenwashing; a practice whereby companies misrepresent their green credentials. So how can it best be avoided by funds when they are working with investors?
Greenwashing – data is key to prevention
As concerns about climate change prevailed, institutions started insisting that asset managers adopt sustainable practices – both in terms of their portfolio construction and operational processes – as a pre-condition for investment. The good news is that fund managers have largely embraced the ESG cause. There is however still no consensus on ESG standards globally, which has allowed for different approaches by corporates and in some cases accusations of greenwashing. As ESG is so subjective, it allows for a degree of interpretation and flexibility over what counts as an acceptable investment. For example, a fund manager could potentially justify investing into an oil major on ESG grounds but would have to demonstrate that it has been actively engaging with that company as it’s strategy is to transition to net zero, even though that isn’t the case yet. Other managers could describe themselves as being ESG compliant, but are then investing into ‘brown’ companies, who have promised changes to become more ESG compliant but failed to deliver. If such behaviour at the corporate level goes on unchecked, then investors’ faith in the ESG knowledge of their funds managers could be severely dented.
A number of investors are taking a hard line on the issue of greenwashing. Some have started divesting from managers whose ESG credentials are not solid, while others are not awarding mandates where they suspect greenwashing. Regulators globally are also looking to tackle some of the issues which have engulfed the ESG funds market. The US Securities and Exchange Commission (SEC) is being firm on egregious ESG mislabelling, as it looks to impose a new “Fund Names” requirement, which would prohibit managers from using ESG labels (i.e. calling themselves a Green Fund) if they are not investing in ESG assets. Fines have already been levied for egregious ESG practices. Bloomberg reported that BNY Mellon’s investment arm was fined for falsely implying that some of its mutual funds had undergone ESG quality reviews. Meanwhile, reports suggest that a handful of mutual funds operated by Goldman Sachs are facing SEC scrutiny over claims that their ESG metrics do not align with their marketing materials.
So how can firms avoid incurring the wrath of regulators and investors when it comes to ESG?
At a most rudimentary level, asset managers need to evidence how they apply ESG into their investment processes, something which can be facilitated through a best in class data management system. By leveraging Enterprise data management system, firms can seamlessly report their ESG metrics to clients – and if necessary – regulators.
Those investment firms which carefully document their ESG processes and adopt a rigorous approach to data management will be in the strongest position moving forward as we start to see some continuity in the way ESG data is reported at every level. It is clear that institutions and regulators are taking an increasingly uncompromising line on ESG, so effective recordkeeping and transparency on this issue will be vital if fund managers are to win mandates and avoid scrutiny from investors and regulators alike.
An effective data management platform gives the manager a 360-degree view of their investment strategies, and will help managers align their clients wishes to true ESG funds while also allowing for continued monitoring of funds as part of overall profiling. ESG ultimately will become another data marker for the investor. We are at the point where corporates and managers need to evidence their decision making based on factual data points instead of expected changes to policy. An enterprise data management places useable, readable, and reliable data in front of the manager to facilitate their investor relationships.
Skadden – February 11,2022 – ESG: 2021 Trends and Expectations for 2022
Bloomberg – May 23,2022 – BNY Mellon to pay $1.5 million to SEC for ESG fundlabels
FinancialTimes – June 11, 2022 – SEC investigating Goldman Sachs for ESG claims