Everyone is familiar with the concept of greenwashing by now. Companies showing of their green potential while in reality hardly anything is happening. You also have to deal with this when you put your money in investment funds. Lucy Carraz (business development director) also found this out while she was looking for a more sustainable way to invest her money.
With intent to invest sustainably, Carraz went looking for funds that cared about a sustainable way of operating business and ended up with the investment platform Nutmeg that offered investments in ESG funds . ESG stands for 'Environmental', 'Social' and 'Governance'. In reality, these three core values turned out to get less attention. A large proportion of the shares were in fact in bank shares, Carraz found. She was not the only one to draw this conclusion. Many large investors came to the realization that their money was not going where it was supposed to go. Scandals involving misleading information about "sustainable" investing have surfaced more often than not. Words like 'green' or 'socially responsible' are examples of vague terms used by funds to mislead, says Fiona Huntriss. Huntriss is a partner at Pallas Partners, a law firm that focuses on financial law. She has experienced her fair share of misleading sales scandal cases. The vague words from the investment industry have always been disputed. Simplified terms like 'sustainable' and 'ethical' can be twisted easily.
Currently, green, ecological, sustainable and ethical products are in high demand. In the last quarter of 2021, some $142.5 billion was invested in sustainable funds. This brings the total global sustainable assets to $2.7 trillion, three quarters of which owned in Europe. A large part of this does not seem to be invested in the intended goals. Previous scandals have already led to monitoring this industry more closely. In daily business, however, it turns out to be more difficult. Fund companies themselves use ESG metrics from third parties and their own research. They too are exploring the paths to provide the right information. Although there is an awareness of uncertainty about the actual sustainable outcome of activities invested in, these funds still promote with 'sustainable' and 'green'. The German government agency BaFin launched an investigation into DWS after the former head of ESG allegedly misled clients.
What defines being sustainable?
Using terms such as ESG have a heavier legal connotation than thought say lawyers. Funds can get into quite a mess when corporate responsibility results do not match their promises.
One measure of how to assess corporate responsibility is the Paris climate accord, says Luke Fletcher. The Paris agreement is technically binding on countries and ensures that many, especially larger companies, are complying. It also seems that the basics of the agreement are being adopted by judges. Last year, Shell was forced to reduce its CO2 emissions because they 'can and (therefore) must'. This slowly but surely brings about a change in the fund industry. Still, there are many uncertainties regarding laws in this area. Ultimately, it can have major consequences for an industry that has already made free use of terms such as 'sustainable' and 'ethical'.
A report by InfluenceMap presented figures on the amount of ESG equity funds that were not aligned with the Paris climate accord. 421 out of 593 funds had a portfolio that showed little attention to the climate goals. Furthermore, research showed that 72 of the 130 climate themed funds did not respect the European climate goals as well. It was even found that many of those funds invested in oil companies like Chevron and Exxon Mobile. BNP Paribas, a climate-oriented bank based in Paris, also had ties to Chevron. Those ties were broken shortly after publishing, but still, it remains unsettling. It seems clear to me that funds with the label 'sustainable' that invest in fossil fuels do not deserve that label, says Dylan Tanner, executive director at InfluenceMap.
The development of ESG funds has been rapid. Financial regulations for such labels, as ESG, are usually much slower. As a result, monitoring fair play is difficult. A misleading sales scandal is the result in this case. Although verification presents difficulties, there is a movement in which regulators are tightening the rules allowing investors to test funds' claims. The Competition and Markets Authority has issued a code for green claims. This allows companies to gain detailed insight into how to make responsible and sincere claims in terms of ESGs. Advertising Standards Agency also appointed the importance of monitoring ads. After all, people are more likely to research and arrange their investments themselves.
Insiders who understand the importance of sincere claims about ESGs are looking at the possibility of litigation. In Italy, in a recent case between microfiber producer Alcantara and rival Miko, Miko has been demanded to stop making false green claims that are vague and unverifiable.
Ultimately, it is important for funds to limit false claims because, as mentioned earlier, it can cause major problems. One of these problems lay in the definition of 'loss'. In theory, an investor who had put money into an ESG fund that invested in unsustainable stocks might make more money than he would have in a fund that invested only in sustainable companies. Still, he could suffer a loss considering the damage that is done to the environment.
More focused attention on legislation is therefore important for the future. And such concepts as loss need to be clearyly defined in order to really pronounce on it. Although one can already speak of a new misleading sales scandal, it may contribute to a better future.
Source: Fletcher, L, Oliver, J. (2022, 20 february). Green investing: the risk of a new mis-selling scandal. Consulted on march the 5th 2022, from https://www.ft.com/content/ae78c05a-0481-4774-8f9b-d3f02e4f2c6f