Tackling the growth of greenwashing
by Mubaasil Hassan, Curation Corp
Carbon emissions, biodiversity loss, unsustainable water use, waste generation, air pollution, deforestation — activities your money is backing can have an impact on all of these things. But with so much to take account of and so many different ways of tracking impacts, it can be easy to be fooled by ‘greenwashing’. This practice is often employed by firms and funds to make activities they engage in or back seem more environmentally friendly than they really are.
If you’ve ever been a bit lost when trying to work out the environmental impact of your investments, you’re not alone. The recent growth of ESG funds is positive — it shows the rising interest in helping address climate change and meet the UN’s Sustainable Development Goals. However, research from Pru, for example, has shown that, despite a great deal of investors being interested in ESG investing, they need support to understand all its complexities.
Unfortunately, along with the growth of ESG funds, greenwashing has also become a growing issue in the ESG space. BlackRock, for example, had to rebrand three of its impact investment funds following criticism about them holding stocks such as British American Tobacco and Chevron. When examining the top 20 global ESG funds, the Economist found that each of them, on average, had investments in 17 fossil fuel firms. LGIM has recently come under fire for greenwashing because of securities it holds issued by the Chinese government.
Thankfully, this is an area regulators are also looking to address. The UK’s Financial Conduct Authority (FCA), in response to a number of “poor quality” ESG fund launch applications, has developed a set of guiding principles to ensure funds’ ESG claims are not misleading.
Greenwashing guidance The FCA has broken down its guidelines into three main principles. The first refers to a fund’s documentation, including ensuring its name, financial promotion and fund documentation accurately reflect the ESG/sustainability considerations of its investment strategy. The FCA expects funds to disclose information about their investment strategy, including any screening criteria applied and specific Environmental, Social or Governance ‘real world’ impacts pursued.
The second principle relates to delivery, including ensuring consistency between a fund’s ESG investment strategy and its disclosed objectives. This includes conducting due diligence on any ESG-rating and data providers the fund uses. In the event where a fund’s holdings appear contradictory to an ESG investment strategy, the fund must explain the inconsistency to investors.
The final principle is related to funds’ disclosures — which the FCA said should be easily available, clear and succinct while avoiding the use of jargon and technical terms. The FCA said companies with green targets in such areas as carbon emissions should regularly report on these targets using relevant KPIs. The guiding principles are expectations rather than rules, but it’s expected the FCA will approach them on a comply or explain basis. They will apply to existing funds as much as new funds.
More broadly, the UK does not currently have a regulatory green taxonomy for sustainable investments after the Treasury decided against implementing the EU’s taxonomy after Brexit. However, on 9 June the UK Treasury created the Green Technical Advisory Group (GTAG), which will help deliver a green taxonomy for the UK — a framework to provide clear standards for when investments can be defined as sustainable. The framework will support investors, consumers and businesses on their green financial decisions and will help reduce greenwashing.
Hopefully, these rules, along with other initiatives to tackle greenwashing from regulators and the industry alike, will mean navigating the true green nature of your investments will become less of a minefield.
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