How do you know the sustainability claims being made by a fund manager, financial institution or broker are true? You don’t.
Green Finance Special Report looks at all aspects of the market from green loans to green securitisation, and warns consumers and investors to beware of greenwashing by fund managers, financial institutions and brokers.
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"Greenwashing continues to be identified by investors as a significant concern when it comes to responsible investing," says Conor Holland, director, environmental, social, and governance (ESG), KPMG in Ireland.
It is important that individuals undertake research to ascertain how their portfolio managers are investing responsibly, but knowing where to start can be hard.
“Practically investors should look for the use of independent sustainability ratings and understand the philosophy that underpins the fund or portfolio. For example, how are companies chosen and funds picked? What are the asset managers trying to achieve in the long-term? Do they have a strong track record in this area? This should be clear in the literature they supply,” says Holland.
Investors should also review the way asset managers report on the performance of their funds. “Do they monitor the extent to which they have addressed sustainability challenges rather than just reporting on growth? In sum, look at reports, check for third-party verification, and do a little bit of your own homework to go beyond the tag lines of ‘sustainability’ and ‘green’,” he says.
Greenwashing may not be as commonplace as you fear. "In our experience greenwashing, in the sense of inflated sustainability claims, are not prevalent," says Tara Doyle, a partner at law firm Matheson and head of its asset management and investment funds department.
She believes fund managers and other financial institutions have been reacting to, and proactively anticipating, increased investor appetite for sustainable financial products for some time and, in the absence of any common disclosure standards being mandated by regulators, had in many cases signed up to voluntary codes.
but just as investment styles and philosophies can vary from manager to manager, approaches to sustainability and environmental, social, and governance (ESG) philosophies can vary too.
Help is at hand on that front, she points out, in the form of a new EU ESG Action Plan which has as one of its aims the establishment of a common language for sustainable finance.
“This aim, when realised, should ensure that language used in one product description has the same meaning as it does when used in the description of a competing product, and any claims made by financial market participants in relation to the sustainability of their products should be verifiable,” says Doyle.
“If financial market participants are currently engaged in greenwashing the obligation to back up commonly understood sustainability claims with data-based reporting should eliminate such practices.”
Obligations
The new ESG disclosure regime imposes regulatory obligations on financial market participants to make public disclosures on their websites, in their pre-contractual documents and in their periodic reports.
“It is a disclosure regime first and foremost, so unlike a product regime, such as UCITS, it does not introduce rights and remedies for investors. Breaches of the regime will be subject to regulatory sanctions, but do not create a direct right of recourse for individual investors,” she says.
It does not rule out more conventional claims, such as mis-selling, but investors would have to demonstrate that they had suffered a loss requiring compensation as a result of the breach of the disclosure regime.
For customers, their advisers and regulator what the new moves mean "is greater transparency and ongoing reporting for funds which position themselves as sustainable, all of which are absolutely in the customers' best interests", says Sandra Rockett, director, wealth and corporate distribution, Irish Life investment managers (ILIM).
ILIM already reports on the number of voting events it participates in on behalf of customers in recognition of the responsibility it has to be their voice.
“We also detail the engagements, whether directly with the companies or collectively with other investment managers, and the positive changes those engagements have had. By speaking up we can help make these companies more sustainable, and that benefits our customers returns in the long run,” she says.
Irish Life has been an advocate of responsible investment practices since 2010 when it joined the UN supported Principles for Responsible Investment.
“We hold ourselves to a global standard and in addition to transparency and disclosures we seek independent verification from global rating agencies that the actions we are taking enable us meet our responsibility to customers,” says Rockett.
“We provide information to our customers on what the sustainability objectives of these funds are and how they are met before they buy any products from us, and we provide ongoing reporting as to how these funds are positioned in terms of their sustainability objectives.”
Complain
If you are unhappy about any company’s claims, there are steps you can take.
“Investors can complain directly to the fund manager, complain to the Financial Services and Pensions Ombudsman or take a private legal action seeking one or more civil reliefs,” says Lorena Dunne, a partner in William Fry’s asset management & investment funds and co-head of William Fry’s ESG and sustainability practice group.
She says investor due diligence is a prerequisite to any investment, and the new body of EU sustainable finance disclosure rules aims specifically to facilitate the conduct of such due diligence in respect of green investment products.
“More generally, regulated financial service providers are subject to an array of investor protection rules, and investors have a range of rights, as set out in the offering documents, such as a right to attend and vote at general meetings, to redeem or switch their investment, to request various documents and personal data rights,” adds Dunne.
