Nawar Alsaadi, Director, ESG Insights, NEI, explains how to guard against the threat of deception but offers hope for future regulations
Greenwashing is rightly condemned for not only misleading investors but also undermining efforts to protect our planet. In many ways, it’s a classic case of chasing a short-term buck at the expense of long-term prosperity. Nawar Alsaadi, Director, ESG Insights, NEI is clear that conveying a false impression of the environmental character of a company’s product is a serious and underhand issue, but he told WP that perspective is required.
He believes that not only are the vast majority of professionals in the ESG space genuine about their interest in responsible investing but that the few bad apples will be weeded out as regulation becomes more standardized. Ignore the issue and the industry will be harmed, he added, but regulators and RI associations around the world are addressing the issue.
Europe, typically when it comes to this space, is leading the way, with the introduction of stringent ESG disclosure regulations that have forced green-washers out of the market. However, the threat, at least in North America, remains.
What is greenwashing?
Greenwashing is when a company deceives consumers, using false credentials, into believing that a given product or service is environmentally friendly. For example, a passive fund with an ESG-related name may actually track a non-ESG index while a fund claiming to invest in companies contributing to “positive environmental impact” might not demonstrate how that supposed impact is measured. Other examples include a climate change fund including high carbon emission firms without providing context or a company might sell a green bond without clarity as to the use of proceeds.
The term itself was coined in 1986 by the American environmentalist Jay Westerveld after he saw a card in a motel room promoting the reuse of towels to protect the environment. Rather than being driven by a genuine concern for the environment, he observed that the hotel industry was pushing the reuse of towels as a cost-saving measure.
Research from the Swiss Finance Institute indicated that ESG greenwashing was likely a bigger issue in the U.S. compared to other markets. It found that, in the U.S., signatories to the UN Principles for Responsible Investing actually had a lower ESG rating than non-signatories. Thankfully, this is not the case in Canada according to the same research paper. Nonetheless, information on greenwashing remains murky in Canada, and additional regulation and oversight in this regard is welcome.
How can advisors guard against greenwashing?
There is not one single thing you can do, Alsaadi warned. Instead, it takes some “detective work”. To help, the NEI Director has compiled 13 questions for advisors to ask when assessing fund managers for greenwashing. They are:
1, Is it a new entrant or established ESG/sustainable investing provider?
2, Is the fund ESG purpose built, or a repurposed conventional fund?
3, Does the firm have a responsible investment policy?
4, What is the level of ESG integration within the investment process? What are the sources of ESG data?
5, What is the size and experience of the ESG team?
6, What is the ESG product’s sophistication? (exclusion, ESG integration, impact … etc.)
7, What is the firm’s ESG engagement capability and engagement history?
8, Does it feature transparent engagement, proxy reporting?
9, Do they provide ESG/sustainable investing research and thought leadership?
10, Does the firm have sustainability practices, like diversity and inclusion?
11, How aligned to the ESG objective are the stocks, bonds and other financial instruments held in portfolio?
12, What’s the fund’s ESG rating (Morningstar, MSCI)?
13, In case of bonds, check for Green Bond Principles or Climate Bonds Initiative label.
Alsaadi stressed that, regarding the first question, being new to the space doesn’t alone mean a company is not serious about RI but the follow-up questions should provide a more rounded view. The process should take an advisor around two hours to formulate a view.
He said: “If you have clients who want to have a positive impact on the world, and a positive sustainability impact, you have to make sure that you are delivering,” he said.
“An advisor takes time to assess funds, financial performance, and the credentials of the firm managing the assets or the background of the fund managers. There is a certain process to make sure that you are deploying capital with credible managers that are aligned with the strategy you are advocating for your client. This is just an additional initial component.”
He conceded that ESG regulation remains uneven, hence vigilance when choosing a responsible investing product is critical to make sure you don’t block real change and siphon funds away from a legitimate climate change fund and into a polluting one. He added: “That’s disastrous for your client, and for yourself if clients end up finding they own high carbon emitters in a sustainable fund that doesn’t have a credible climate change engagement strategy. Sustainable funds are critical to the fight against climate change, and that claim to sustainability should be reflected in the fund composition and strategy.
With Europe having introduced stricter ESG fund definitions and criteria, Australasia having strengthened its standard, the U.S. increasingly looking at climate change and its disclosures, and the CFA institute having recently submitted a draft proposal on ESG standards, which NEI contributed commentary on, the world is increasingly, albeit gradually, moving towards a more unified ESG regulatory approach.
Alsaadi believes we are two to three years away from greenwashing being less of an issue and that advisors should feel confident that the industry is trying to work through its associations and regulators to address the issue.
He said: “This is really a temporary phenomenon. I don't know if we'll ever eradicated it 100% but I think this will be a diminishing issue over time and not a permanent state of affairs.”