Avoiding greenwashing in asset management

We recently shared a blog piece about the loudening chorus of ESG criticism around the world, and what this could mean for the progression of corporate sustainability practices. A particular area of concern is greenwashing. Greenwashing has been described by the UK government as businesses or investment funds making “misleading or unsubstantiated claims about environmental performance” of their products or activities. Through marketing, it’s alleged that asset managers sometimes present misleading and unsubstantiated information for a product or fund, and in doing so, whether purposefully or not, deceive investors. 

It’s important to note that because of the many data sets and ratings used to support the claims of asset managers, it is plausible that any overstating of a sustainability profile and characteristics could be accidental.

What is certain, however, is that progress can only come with increased disclosure and transparency.

Avoiding greenwashing in asset management

In the U.S, the Securities and Exchange Commission (SEC) has proposed updated disclosure rules requiring registrants to make certain climate-related disclosures, including information about climate-related risks that are likely to have a material impact on their business. 

The European Commission’s Green Taxonomy came into effect earlier this year and provides a common language and clear definition of what is ‘sustainable’ with a classification system, establishing a list of environmentally sustainable economic activities. 

These rules are in addition to the Sustainable Finance Disclosure Regulation (SFDR Regulation), which imposes mandatory ESG disclosure obligations so as funds are more comparable and better understood by end-investors. From 1st January 2023 the SFDR Delegated Regulation, containing more precise disclosure standards, will apply.

Increasing regulation, on top of growing consumer focus on making money ‘do good’, means asset managers have a great deal to process. Throw in non-standardised sustainability data and the unfamiliar terminology of the sustainable-investing landscape and it’s easy to see how inadvertent greenwashing can take place. 

A holistic approach to prevent greenwashing

It’s vital that ESG reporting processes are integrated into a coherent and company-wide system of sustainability governance. This should be actively supported at senior management-level and complemented by the introduction of tangible policies and metrics for tracking progress.

Engagement, accountability, and data transparency and standardisation are key. Greenwashing risks need to be addressed when setting up firm-wide and fund specific strategies. As indicated by recent regulatory initiatives, firms should take a holistic approach towards mitigating greenwashing. Risk should be managed at each stage of business activity from product development to ongoing reporting, and involve all relevant functions.

Entering and maintaining an active dialogue, including the exercise of voting rights, is an effective tool for promoting social responsibility, environmental protection and transparency. Through engaging with companies it’s easier to assess their alignment with your sustainability criteria and to influence the integration of ESG factors into their management decisions. 

Get reporting right

As ESG disclosures are exposed to soaring public, regulatory and media scrutiny, now is the time to optimise data capture with an industry-trusted system like SI Engage. Manage and measure data and engagements knowing your outcomes are robust. You’ll be able to confidently report to stakeholders, while getting a true picture of progress – good for the product or fund, and in the context of ESG practice, the journey towards a more sustainable world.

Get in touch to get started!

Image credit to Vecteezy.com.

 

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