Why advisors must manage clients' ESG expectations

Accusations of greenwashing often boil down to gap between asset managers and investors

Why advisors must manage clients' ESG expectations

As an increasing number of investors consider integrating ESG into their portfolios, it’s increasingly crucial for advisors to educate clients and manage their expectations to avoid greenwashing claims.

That was one of the key take-home messages that Hortense Bioy, global director of sustainability research at Morningstar, shared at the firm’s June 30 investment conference.

As reported by FTAdviser, Bioy noted how the lack of sector consensus on green investments has allowed diverse opinions to thrive across the market. Among other things, that has led to a gap between asset managers and investors, who have their own preferences for sustainability and financial constraints.

“One problem is that investors mean different things when they say sustainable investing,” Bioy said. “You need to understand your clients' values and expectations and make sure there isn't too big a gap between those and the green characteristics of the portfolios.”

Given the appeal of ESG among investors right now, asset managers can be tempted to make bold claims and potentially oversell their products’ ESG benefits. But as Bioy noted, there’s more than one way to evaluate a fund’s ESG performance, which is why transparency and disclosure are must-have weapons against greenwashing.

“The key is to find the right data points, ratings and scores to answer the questions end investors have,” she said. “Investors need to do their due diligence and ensure they understand the nuances between ESG approaches and the different shades of green.”

And while asset managers are taking positive steps by engaging with portfolio companies on ESG and sustainability, Bioy noted that engagement efforts are often opaque, making it difficult for end investors to determine how impactful and beneficial those activities are.

“Asset managers needs to disclose more information on the way they vote and engage with companies [around sustainability] so they can be made accountable,” she said.


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