By Amanda Latham, Associate and Policy & Strategy Lead at barnett Waddingham
We’re also seeing more climate disclosures from investors like asset managers, pension schemes and insurers. With all this disclosure and marketing of sustainable investments, policies and commitments, it is crucial to separate the truly green and sustainable from so-called “greenwashing”.
Misleading marketing
Greenwashing is a potentially harmful marketing practise where the environmental or sustainable benefits of a product, strategy or service are overemphasised, misrepresenting what is on offer and therefore misleading customers, investors and other stakeholders. These exaggerated claims allow companies to capitalise on the growing popularity and demand for environmental products and services, and the parallel increasing demand for sustainable investments.
Following numerous accusations and a whistleblower claim by the former head of sustainability at DWS, both DWS and Deutsche Bank came under fire by German and U.S. officials for greenwashing. Both institutions were raided by police and investigations were carried out that found them guilty of exaggerating the ESG credentials of investments. German prosecutors found that although there was evidence to suggest ESG factors had been considered in a small number of investments, these were not reflected in a range of other investments, contrary to what DWS marketed in their sales prospectus. Following the raids, the chief executive of DWS stepped down from his position.
In a similar case, the U.S. Securities and Exchange commission (SEC) charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about ESG in their investment decisions for certain mutual funds under their management. According to SEC’s order, between July 2018 to September 2021, BNY claimed that ESG quality reviews had been undertaken for all investments in the funds. However, the SEC found a large number of funds in fact did not have ESG quality review scores at the time of investment. To settle the charges BNY agreed to pay the $1.5 million penalty.
ESG issues
As the rise in demand grows for more ESG and sustainable investment options, the greater the imperative for fund managers to tap into these burgeoning markets. And we are now seeing growing numbers of firms (whether knowingly or unknowingly) overstating and exaggerating their sustainability credentials.
A lack of standardised reporting practises for ESG and sustainability data, together with a lack of consistent accounting and auditing standards to review and assure the data, also causes problems. Greenwashing occurs when there is a lack of transparency and action behind what an organisation is marketing or reporting. So fund managers need to be clear on what they are offering, and be able to back up their claims using solid data. Transparency is the key.
So how can investors avoid accusations of greenwashing? You may think that it is simply about having the right intentions, but this too could be tricky – making net zero commitments, without clear plans, milestones or actions in place to achieve them, could be seen as a form of greenwashing too when under scrutiny.
One way to limit greenwashing is to treat climate disclosures as more than simply a tick-box exercise and instead use them as a basis to ask probing questions of your advisers and managers. If they have a net zero commitment, look to understand if they are using a standard framework like the Net Zero Investment Consultants Initiative (NZICI) or the Net Zero Asset Managers initiative (NZAM).
These initiatives are designed to push the boundaries as well as to provide a forum for collaboration to move things forward faster. That means you are going to get the most recent thinking and fit for purpose capabilities from investment consultants and asset managers who are part of these initiatives. While this is no guarantee of success, at least an effort is being made?
Another area where investors may be at risk of accidental greenwashing is through their regulatory climate reporting. With more investors now required to make disclosures showing the outcomes of climate scenario modelling, more attention is coming to this area. Climate scenario modelling is difficult - it’s not just planning for 5-10 years, but for 30 years or more. When it comes to modelling global climate scenarios and their effects on assets and operations, it is complex and requires data that is not all there at present. Where models show very limited financial impacts from climate change over 20-30 year time horizons, with extensive caveats and exclusions, will investors relying on these reports and analysis later come to see these results as greenwashing?
Conclusion
We know there is not all the data we need, as this is a developing area, so that’s why at BW we’re using narrative scenarios and indicators to help investors focus their governance time and energy on the areas that matter most.
We don’t think it’s helpful to give you a report showing a minuscule % impact on your assets or portfolio from a model that doesn’t include assumptions on the financial impacts of things like huge population movements, crop failures and unavoidable changes in land use, all of which scientists expect climate change to cause. Instead, we want to show you the assets that have the most risk (and the most opportunity) to help you monitor, manage and mitigate climate change across your portfolio.
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