There’s concern that many sustainable funds, which have grown immensely over the past five years, have been mislabelled, leading to a regulatory crackdown expected to continue into 2023.
Greenwashing threatens credibility of asset managers
Environmental, social and governance (ESG) issues have expanded into the mainstream of the corporate world in recent years, and an increasing number of asset managers now offer ESG-labelled investment products. However, ‘greenwashing’, in which the environmental claims made do not match reality and are designed to deliberately mislead consumers, can cause enormous reputational damage and threatens to discredit the corporate world in general.
Even some of the largest and most renowned firms can succumb to accusations of greenwashing as they strive to establish their ESG credentials. Half the carbon offsets held by British Gas owner Centrica were recently found to be ‘junk credits’ that were issued under a discredited scheme. Meanwhile, the world’s biggest consumer bank, HSBC, was forced to pull an ad campaign in the United Kingdom after the advertising watchdog ruled that HSBC was touting a tree-planting scheme to offset carbon without acknowledging that it finances fossil-fuel projects at the same time.
In early 2023, Bloomberg said that greenwashing may be the biggest risk to the future of ESG investing. Yet, the agency added, there’s no firm agreement on what it means in a legal or regulatory context. Bloomberg added that ‘it’s typically used when companies, people or governments overstate, misrepresent or just plain lie about their climate credentials.’ 1
Too many grey areas
The lack of a common definition of greenwashing among the regulatory authorities makes it difficult to stamp out the practice. Bloomberg quotes Maia Godemer, a London-based sustainable finance analyst at BloombergNEF, as saying:
‘The battle to stamp out greenwashing continues to be foiled by the lack of a clear and common definition across jurisdictions. The market can only continue to flourish if regulators build a common framework around what is considered environmentally or socially sustainable.’
Bloomberg adds that while policymakers in Europe have been the most aggressive in trying to flesh out such a framework, the region’s market watchdog, the European Securities and Markets Authority, still struggles to specifically describe what greenwashing is.
EU leads the charge against greenwashing
Nonetheless, efforts to combat the practice have already had a dramatic effect, with many asset managers forced to stop claiming levels of sustainability in investments that don’t meet the new standard. During the second half of 2022, huge asset managers such as Amundi and BlackRock ceased claiming that US$140 billion worth of their funds qualified for the EU’s top ESG designation, known as Article 9.
Fund managers have downgraded more than $140bn in ESG assets
Not what it says on the tin
Regulators in the US and the UK are also investigating ESG funds amid concerns that asset managers are simply renaming existing products rather than building new ones, prompting doubts about the authenticity of the ESG claims made by these funds.
In the US, asset managers have reassessed trillions of dollars in sustainable investments, stripping them of their previously reported ESG status, according to the US Forum for Sustainable and Responsible Investment (US SIF). According to a report published by the association in December 2022, sustainable-investing assets in the US plunged by more than half as a result, from US$17.1 trillion at the end of 2019 to US$8.4 trillion at the end of 2021.2
US SIF says this more cautious approach was at least partly triggered by recent US Securities and Exchange Commission (SEC) proposals to crack down on greenwashing by raising standards on names and disclosure requirements for ESG funds.
The shakeout is likely to continue in 2023 as regulators and consumers press for improved transparency of funds. Improving asset managers’ credentials in this area can only be positive for the continued long-term growth of the sector, while a failure to address these concerns risks discrediting the sector entirely.
1 https://www.bloomberg.com/news/articles/2023-01-11/what-s-the-legal-definition-of-greenwashing-green-insight?leadSource=uverify%20wall
2 https://www.corporateknights.com/category-finance/u-s-sustainable-investing-assets-plunge-by-more-than-us8-trillion/
Publication date:
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither IGA nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Contact us
Let us create a solution tailored for your needs. Get in touch with our Singapore-based team by phone or email to discuss your objectives, or request a brochure.
