Why a crackdown on ‘greenwashing’ shouldn’t have come as a surprise

Under the SEC’s proposals, fund managers should disclose the ESG factors they consider and the specific strategies, criteria and data they use to invest accordingly. They should also release metrics such as the greenhouse gas emissions of their portfolios and their annual progress toward their ESG goals.

In Australia, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission have both shown increasing interest in ESG-related disclosures by fund managers and companies, with ASIC last year launching an investigation into greenwashing by pensions and managed funds and the ACCC warning that companies that falsely promote their green credentials face a crackdown.

Even before the DWS raid, there were other instances of regulatory action related to ESG disclosure issues.

Last month, the SEC fined the Bank of New York Mellon Corp. $1.5 million for misleading claims about its ESG funds.

The commission has also taken action against Brazil’s Vale, alleging that the giant iron ore miner had made false and misleading statements about dam safety in its sustainability reports and other ESG disclosures.

Ensuring that what ESG-labelled funds actually do aligns with what they say they do is no easy task, as there is no consensus on what constitutes ethical investing and there are currently few benchmarks against which to test whether the behavior of funds is faithful to what is a very wide range of ESG labels.

It is the dual appeal of funds that claim to do good and support companies that meet ESG criteria and the claims of superior performance that are driving the industry’s growth.

Is an ethical investment one that has no carbon footprint and ticks all the boxes for good governance, or could the category also include, for example, a mining company with a clear and measurable commitment to reduce its carbon emissions and those of its customers?

An example of this is Shell, which has committed, under a court order, to nearly halve its emissions and those of its suppliers from 2019 levels by 2030. Should it be shunned or backed by ESG investors?

In practice, companies like Shell are shunned by some investors on ESG grounds, but embraced by others. ESG investment frameworks are broad and vague.

Likewise, it is difficult to test the industry’s claims of superior performance – claims that have helped, along with increased investor interest in ethical investing, have led to a massive influx of funds to the ESG executives. Bloomberg’s intelligence unit has projected that by 2025, the sector will have about $50 trillion in funds under management, or about a third of the world’s funds under management.

It is the dual appeal of funds claiming to do good and backing companies that meet ESG criteria and the claims of superior performance – end investors can both soothe their conscience and be rewarded for doing so – that is boosting the industry’s growth.

Whether that’s because the underlying companies that tick their boxes inherently outperform or the external environment has favored the types of stocks that generate fewer ESG problems in recent years (carbon-light tech stocks have performed spectacularly until recently). ) and whether the same investment performance can be achieved by non-ESG labeled funds with good asset allocations and stock selections is open to debate.

What the regulators are apparently not going to discuss, however, is the mounting pressure to ensure that funds that claim to be ESG investors can demonstrate that they have the systems, strategies and metrics to back up and substantiate those claims. .

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That is not unreasonable. What the funds actually do should be in line with their marketing. However, for the funds and their regulators, given the extent of the gray areas in the definitions of ESG investing, this could prove easier, or at least more challenging, when said than done.

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