That environmental, social and governance (ESG) investing is on the rise is nothing new, but investors and regulators are becoming more fastidious and diligent when scrutinising ESG claims made by asset managers.
Experts discussed some of the main trends underway in the world of ESG during an INDOS Financial, a JTC Group company, roundtable.
The US takes no prisoners on greenwashing
While the European Union (EU) is in the process of developing a taxonomy detailing what it believes are sustainable economic activities, something regulators hope will help investors and managers benchmark ESG properly, the US is finally playing catch-up, having been sat on the side-lines for some time now.
“ESG is pretty mainstream across the board and the US Securities and Exchange Commission (SEC) is taking quite an aggressive stance on greenwashing, or mislabelling by asset managers,” according to Jon Masters, Head of Business Development at JTC Group.
Firstly, the SEC wants to stop asset managers cynically naming their funds “ESG” when the underlying investments in the portfolio do not correspond with that label. Under the SEC’s proposals, known as the Fund Names Rule, any fund calling themselves ‘ESG’, in the name or branding, must have exposures of at least 80% to ESG assets.
This clampdown comes as regulators become increasingly alarmed that some managers are marketing their funds as being ESG compliant, despite this description not necessarily chiming with their actual portfolio holdings.
The SEC is also tightening up on ESG disclosure requirements, by demanding that managers operating ESG strategies provide additional information on ESG. The SEC has already made examples of several asset managers, imposing a significant fine on one major firm for making misleading ESG statements and omitting key information from investors about its ESG practices.
Investors take managers to task on ESG
It is not just regulators who are challenging managers on their ESG practices and behaviour. “We know of an increasing number of funds who say ‘investors will not invest unless we have an ESG policy in place’. Many of them are sending detailed spreadsheets covering all sorts of questions about ESG,” says Julianne Recine, Managing Director at Kroll.
Others concur: “We are fundraising at the moment, and we have found that German investors in particular are asking for a lot of information about ESG, on everything from our policies to how we measure carbon emissions”.
However, reaching consensus on ESG is not easy. The sheer volume of contradictory standards around ESG has simply confused the industry, while the lack of agreement among investors can also be problematic.
All of this makes it harder for managers to formulate a comprehensive ESG strategy, according to Jack Inglis, CEO at Alternative Investment Management Association (AIMA). “Two investors might take very different investment approaches. One might favour complete divestment from non-ESG stocks whereas another might be open to investing into pollutant securities providing the company is in the process of transitioning. If you are a manager trying to make sense of ESG, then having to deal with such different approaches is going to be very difficult,” says Inglis.
Managers need to back up their ESG claims
Investment firms touting themselves as being “ESG compliant” (either for SFDR, EU Taxonomy or other ESG frameworks) now need to provide evidence to back up their assertions. Investors and regulators have run out of patience with managers who make spurious claims about their commitment to sustainability.
Mislabelling funds as ESG now has serious consequences. In addition to investors withdrawing money or refusing to allocate, it is likely regulators, such as the SEC, could impose punitive fines on managers who they believe are marketing funds as being ESG products when they are not.
To discuss the matters raised in this article, including ESG and greenwashing, please get in touch directly with Victoria Gillespie, Head of ESG Services.
 Clifford Chance – May 27, 2022 – The risks are turning green: SEC begins greenwashing enforcement