“Greenwashing” – organisations making false or exaggerated claims about their environmentally progressive credentials and performance – is the scourge of sustainability. However, flagrant examples in recent years mean there is now much more vigilance among investors around it.
“Investors are acutely aware of the idea of greenwashing and, equally, this has been a key area of regulatory focus for European and global regulators,” says Siobhán McBean, partner in law firm Arthur Cox’s asset management and investment funds group.
The EU Sustainable Finance Disclosure Regulation (SFDR) has sought to place clear parameters on how green the investment strategy of a fund is, says Philip Murphy, financial services tax partner at KPMG.
“This is done by requiring fund managers to classify their funds based on their sustainability performance into three broad categories: Article 6, 8, and 9,” he explains. “In practice, this makes it harder for fund managers to ‘greenwash’ their funds – ie, they cannot brand a fund with an ESG [environmental, social and governance] or sustainability label, without being transparent with regards to how this is achieved.”
But while Murphy acknowledges that this is “a huge step forward” in ensuring investors have sufficient information to make a decision when comparing funds from a sustainability perspective, in practice not all investor categories have been focused on the specific designation of a fund as the determining factor underpinning their investment decision.
“Whilst investors will often look to the categorisation of the fund as a guide, in practice their investment decision will likely be more focused on whether the type of return and underlying assets held by the fund align to their specific requirements,” he says.
McBean agrees with this assessment. “This regime is intended to enable investors to compare different ESG funds and the impact they are having,” she says. “However, these disclosures are complex and issues around data quality haven’t necessarily helped investors to understand the ESG features of the funds they are investing in.”
The European financial regulator, ESMA, has issued a number of supervisory briefings and regulatory consultations on this topic in recent years, notes McBean, leading to its formal guidelines for funds using ESG or sustainability related terms in their fund names.
“The guidelines take effect from November this year and specify the minimum percentage of fund assets that must meet the relevant ESG characteristics and the exclusions they must apply,” she says. “While there has been some debate over how best to quantify a fund’s green credentials, we are likely moving towards some form of labelling or categorisation regime for green funds in the coming years.”