There are ever more environmental, social and governance (ESG) or 'green' investment products available but, in the absence of universal ESG standards, how can investors know how green a fund actually is?
By Erica Hall. Erica is an ESG analyst at Morningstar Australiasia, and a casual Financial Planning academic at Deakin Business School.
As interest in sustainable investing continues to grow, there has been a corresponding increase in environmental, social, and governance or "green" investment products. One of the biggest challenges that sustainability-oriented investors face is the lack of universal ESG standards, which can make it difficult to ascertain how green a fund is.
According to leading sustainability expert Ma Jun, there may be 200 ESG taxonomies in existence already. Standards vary across countries; what may be considered a green investment in one country does not make the grade in another. When ESG standards differ, it creates inefficiencies. Meaningful comparisons then can become more difficult and, in turn, may inhibit efficient allocation of capital. Further, ambiguity leads to increased risks of greenwashing.
Greenwashing is making unsubstantiated or misleading claims about the sustainability characteristics and benefits of an investment product. Sometimes other terms are used, such as "sustainability washing," "impact washing," or even "SDG washing," referring to misleading claims about a product’s adherence to the United Nations' Sustainable Development Goals.
Greenwashing is generally seen as intentional, occurring when asset managers overclaim and oversell their green credentials. Such practices are problematic and corrosive to long-term trust and credibility.
Sometimes greenwashing, may not be intentional but instead results from differing definitions of sustainability and/or a mismatch between an investor's expectations and the specific approach used by a sustainable fund.
Intentional greenwashing and the mismatch of expectations can be addressed through disclosure and investor education. Asset managers need to be up front about what's green or sustainable about their products and report on the ESG characteristics of their products. Companies must do the same and be transparent about their business practices, including what is happening in their supply chains.
As investors increasingly choose to invest into sustainable products it’s not surprising that Greenwashing is an area of focus for Australian regulators, with both the Australian Competition and Consumer Commission, or ACCC, and Australian Securities and Investment Commission, or ASIC, identifying Greenwashing amongst their highest priorities for 2022.
To that end ASIC, has been reviewing funds to determine whether those that purport to be green live up to those claims.
To further help manage greenwashing risks, ASIC is involved with the International Organization of Securities Commissions' Sustainable Finance Taskforce; one of the key issues the task force addresses is greenwashing.
ASIC has also advised that it is monitoring the International Sustainability Standards Board, or ISSB, which was set up to address the need for the development of global sustainability standards. The regulator indicated that the work undertaken by ISSB may have implications for future reporting practices locally, particularly for listed companies.
Most recently, on 14 of June 2022, ASIC released an information sheet targeted at superannuation and managed fund issuers to provide clear guidance on how to avoid greenwashing when offering or promoting sustainability-related products. The regulator outlined nine key questions and provided practical examples of what constitutes poor practice that could be deemed misleading. https://asic.gov.au/regulatory-resources/financial-services/how-to-avoid-greenwashing-when-offering-or-promoting-sustainability-related-products/
ACCC have also flagged that it would be focusing on ESG claims under Australian Consumer Law. https://www.accc.gov.au/media-release/compliance-and-enforcement-priorities-for-2022-23
At the National Consumer Congress on 16 June 2022, Chair of the ACCC Ms. Gina Cass-Gottlieb said: “As part of our Compliance and Enforcement priorities we will be looking closely at greenwashing and sustainability claims by businesses. This priority is aimed at addressing concerns that businesses are falsely promoting environmental or green credentials to unfairly capitalise on increasing consumer demand for products or services with these benefits.
It can be difficult for consumers to determine the veracity of a product or businesses’ green credentials. Businesses making false or misleading claims betrays consumer trust and creates an unfair advantage for those businesses doing the wrong thing. We will take enforcement action where we find deliberate deception. It is essential that consumers can have trust in green claims”.
Knowing that greenwashing exists is a great start. Undertake your own research. Look beyond a fund's name or label and understand what its objective is: Does it aim to invest in companies with lower ESG risk? Does it aim to invest in companies that offer solutions to the world's biggest challenges? Does the fund claim to have some sort of impact?
Look under the hood at the fund’s holdings and their ESG characteristics. Many funds with a climate theme don't invest only in green companies. They may also invest in so-called "transition" companies. These companies don't necessarily have good green credentials today but plan to improve their environmental profiles
Many greenwashing accusations come from investors who expected their funds to do something different. But funds come in many flavours. When it comes to sustainable investing there are generally two main investment approaches: mitigating financially material risks or investing for impact.
It is not expected that asset managers will fit neatly into only one sustainable investing approach. Funds can and will deploy multiple approaches, depending on a variety of issues, such as the available investment opportunity set, market conditions, the ability to influence via active ownership, and the trade-off between generating returns and managing ESG quality, to name but a few.
At one end of the sustainable investing framework are exclusions, where the asset manager will screen out or reduce undesired exposures to controversial products such as tobacco, gambling, palm oil, or armaments. At the opposite end of the framework are impact assessments. Asset managers that take this approach positively invest for impact, aiming to address known ESG issues. Often impact funds will link their investments to the UN Sustainable Development Goals, transparently monitoring, measuring, and reporting on the positive impacts generated by their investments. The types of investments within an impact portfolio can be wide-ranging, from supporting innovation occurring in traditional industries such as the automotive sector's production of electric vehicles to help reduce carbon emissions, to supporting newer industries like wind and solar farms as alternative energy sources to fossil fuels. Typically, impact strategies will incorporate multiple sustainable investment approaches into their portfolios such as exclusions, active ownership, and sustainability themes.
ESG investing is not a binary pursuit, understanding the different approaches available can help investors better assess their options, articulate their preferred investment style and avoid falling victim to greenwashing.
 Dr. Ma Jun is chairman of the China Society for Finance and Banking's Green Finance Committee and president of the Institute of Finance and Sustainability. Taxonomy comments were made during his session at the 2021 Fidelity Asia Summit.
 "Common Ground Taxonomy–Climate Change Mitigation." International Platform on Sustainable Finance. https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/211104-ipsf-common-ground-taxonomy-instruction-report_en.pdf
 Armour, C. "What Is 'Greenwashing' and What Are Its Potential Threats?" Australian Securities and Investments Commission. July 2021. https://asic.gov.au/about-asic/news-centre/articles/what-is-greenwashing-and-what-are-its-potential-threats/
 International Sustainability Standards Board. https://www.ifrs.org/groups/international-sustainability-standards-board/
 Corporate Governance Update: Climate Change Risk and Disclosure." Australian Securities and Investments Commission. October 2021. https://asic.gov.au/about-asic/news-centre/speeches/corporate-governance-update-climate-change-risk-and-disclosure/