ESG and ‘Greenwashing’
The rapid upsurge in the investment community’s interest in Environmental, Social and Governance investment products has led to a virtual doubling of ESG focused AUM in the last four years to over $1trn. This has brought with it a plethora of issues, some negative, not least of which is the concept of “greenwashing”. The dictionary definition of greenwashing as a verb is “…..the dissemination of disinformation by an organization so as to present an environmentally responsible public image.” This is undoubtedly a “thing” and is typical of a new market where the products arrive before the forces of oversight. Product manufacturers are very quick to mobilise while the agencies that should be issuing kite marks of authenticity and transparency as well as the regulatory authorities are very slow to appreciate that a new market phenomenon has arrived and are subsequently always behind the curve in tracking it. The EU with its Sustainable Finance Disclosure Regulation (SFDR) is a good example, it is not slated to be in force until March 2021.
It has been said that there are potentially 1,000 data points that could be drawn from a large corporation and examined to give an ESG score. Verification of the validity of the outputs from these companies is incredibly difficult and, much as the big market data houses (Refinitiv, Bloomberg et al) all have proprietary scoring systems, the outputs are only as good as the information supplied to them. Likewise, the index providers (FTSE Russell, MSCI etc) have all embraced this new niche with specific ESG ratings products but once more they are reliant, to a degree on proprietary information provided by their target companies.
As SFDR becomes a set regulation, how are fund managers to demonstrate compliance with the new rules? Take an ESG focused UCITS fund that uses a tier 1 ESG ratings provider to manage a global portfolio. Does the simple fact that the ratings provider has done the heavy lifting in terms of its scoring of their universe satisfy the SFDR criteria? Clearly, a fund management house would also have to demonstrate how it scores itself in ESG terms but that is a fairly simple operation. Do ESG focused products need to be examined over and above the criteria of the ratings agencies?
The new regulations are going to be a big challenge for the fund management community but the rewards could be well worth the effort. The intensification of interest in the ESG space will, if anything, increase. There is a palpable feeling that the Covid19 pandemic is the symptom of a “dirty” world and investors want to be involved in doing something to help clean it.
