As ESG products grow, greenwashing follows

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Sustainable funds are multiplying, and Morningstar warns that some managers are only posing as ESG investors.

ESG investing in Asia still lags other regions. Assets in mutual funds in Asia that follow any sustainability strategy – exclusion, ESG integration or impact investing – amounted to just $12bn as of the end of March, according to data from Morningstar.

In Europe, ESG mutual funds have reached $762bn, while the US has around $441bn.

However, traction for such products is slowly growing. Hong Kong’s regulator, for example, said recently that it had an increase in application for funds with a green or sustainability focus.

Private banks in the region are also seeing increasing demand. DBS Private Bank is now modestly expanding its ESG funds platform, while UBS Wealth Management’s sustainable mandate has reached $400m after it was launched in Asia in April last year.

Re-naming

As sustainable products proliferate, some fund managers have been guilty of “greenwashing” or providing misleading ESG claims to investors in order to capture ESG inflows, according to Hortense Bioy, London-based director for passive strategies and sustainable research at Morningstar.

Last year, in Europe alone, 300 ESG funds were launched, said Bioy, who provided concrete examples of greenwashing in a webinar hosted by Morningstar.

Some managers have re-purposed existing funds by changing product names and strategies.

“Repurposing funds to have an ESG mandate allows managers to leverage existing assets to build their sustainable fund business and avoid having to create funds from scratch.”

Bioy said that while some products’ have been truly changed to follow an ESG mandate, some have not.

“The investment objective has included ESG language, but when you look at the portfolio, nothing or very little has changed.

“It is clear that the manager has just rebranded the fund for marketing purposes, and some people would say this is greenwashing.”

She noted, however, that some managers may need time to change the portfolio, which underscores the need for openness and clarity about the transition period.

Impact washing

A number of products have also included “impact” in their names, suggesting that their investments have a positive effect on the environment or society, according to Bioy.

“New terms have emerged recently, such as ‘impact washing’, which is actually worse than greenwashing,” she said.

Without naming the actual funds, Bioy gave examples of products that are guilty of impact washing.

One is the “Impact US Equity Fund”, a quantitative fund with at least 400 names. According to Bioy, the firm said in its prospectus that the product’s investment objective is to “provide total return by investing in a portfolio of equity securities of companies with positive aggregate societal impact outcomes”.

However, the product’s portfolio included companies with “high levels of controversy”, such as Johnson & Johnson, Wells Fargo, Facebook and Goldman Sachs.

“It also had companies like Exxon Mobil, which an impact investor wouldn’t associate with impact investing. So a lot of investors would think this is a conventional fund, not an impact fund.”

Another example is the “Positive Impact Equity Fund”, which claimed in its fund factsheet that it focuses on companies which, “through their revenue streams, help to solve the world’s most pressing problems such as scarce resources, climate change and poverty”.

However, Bioy found out through an adviser presentation that the fund does not look at company revenue. The firm said  because that particular data is limited, it focused on company operations instead.

“So this is not an impact story. This is more of an ESG story. It is not really delivering impact, and this is not how it is described in its marketing document.”

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