Savvy market watchers see the rise in “sustainable” funds and new opportunities and risks for fund managers. Without standard sustainability definitions – and amid incomplete, unregulated data – regulators, investors and firms alike are concerned about the risk of greenwashing.
“Greenwashing,” when a firm makes misleading or exaggerated claims about products’ environmental benefits, could cause investors to buy the wrong products, undermine market trust and intended impacts, and lead to capital misallocation.
Regulators worry that competitive pressures on asset management firms might cause overselling of sustainable products. Greenwashing is typically seen as a conduct risk, akin to misrepresentation, but it can happen at several levels. Regulators require customer communication to be clear, fair and not misleading. Even without deliberate misconduct, greenwashing – or the perception of it – may arise. To be consistent with regulations, like SFDR’s Articles 8 and 9 guidance, firms should involve relevant functions at each stage of product development and investor interaction.
Five ways to decrease greenwashing
- Transparent sustainability data underpins regulatory disclosures/reporting on non-financial objectives and investment decision-making. Due diligence for third-party data/ratings can be enhanced by in-house capacity for data/limitation analysis and transparent reporting. Firms should proactively assess for divestment/engagement when new data effecting sustainability performance emerges.
- Clear language and communication is crucial in a landscape with evolving terminology. Companies should provide fund-specific documentation and sustainability policies that are transparent, specific and accessible to all investors.
- Firms must disclose information to investors through firm-wide policies and pre-contractual fund-specific documentation that clearly link fund names, objectives and strategies, backed by policies.
- Regulators expect end-investors to receive ongoing reporting that assesses progress on a fund’s objectives. Metrics must be presented in a comprehensible and proactive way.
- Regulators expect complaints to be assessed fairly, consistently and promptly through documented processes. Firms must certify that compliance and other relevant staff are trained in sustainability investing/terminology and data analysis to determine if greenwashing has occurred.
Conclusion
Greenwashing is high on regulator agendas; new disclosure regimes will foster trust in sustainable investments and facilitate efficient capital allocation. Collaboration between portfolio managers, marketing/sales functions and compliance/risk functions will ensure that misalignment between objectives and strategies – or potential for confusion and exaggeration – is addressed promptly. Proactive investor communication is key.
On 21 June 2022, Deloitte Luxembourg will organize its first conference solely focused on sustainability. With a broad cross-section of speakers, Momentum 2022 will tackle sustainability with a focus on understanding and action. Momentum is as a pilot event for the Green Business Events project by the Ministry of Economy’s General Directorate for Tourism. Interested stakeholders can register at www2.deloitte.com/lu/momentum2022.
Editor’s note: This article is brought to you by Deloitte Luxembourg and only reflects the opinion of the author.
