Fund selectors in the UK have listed an increased level of greenwashing in the market and inconsistent definitions of sustainable funds as barriers to allocating more to ‘responsibly’ invested funds, recent research has revealed.
A survey of discretionary fund managers (DFMs) and investment advisers (IA), carried out by financial market research specialist Research in Finance (RiF) found a sharp rise in greenwashing concerns, while as the number of ESG funds hitting the market soars, there is confusion around the definitions.
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In 2020, only 18% said they were “very concerned about greenwashing” – this jumped to 30% in 2021. Furthermore, a fifth (20%) of respondents said they had identified greenwashing in 2021, a significant increase from just 7% who said they had done so in 2019.
The other chief barriers to responsible investing were the lack of consistency in fund managers’ definitions, not having enough options in some asset classes or sectors and concerns that responsible investments have become overvalued. IAs in particular also highlighted the lack of fund research tools with the filters or information needed to search the responsible investment fund universe as another barrier to investment.
RiF’s head of data Sven Radcke commented: “We have seen a big increase in the availability of responsible funds over the past few years, driven by greater awareness and rising client demand. This is a positive development. However, with a wider range of responsible funds available, the need for more scrutiny to assess the ESG credentials of the funds has also increased.
“With no agreed gold-standard for comparing funds, our survey highlights that greenwashing is becoming a genuine concern among fund selectors. To address such concerns, investment providers need to be able to explain clearly how their mandates adhere to specific and tangible ESG outcomes. For example, offer genuine case studies and examples of what makes specific investments held in a portfolio ESG-compliant. Ultimately, transparency and where possible finding a common approach across the industry will be key.”
The research also quoted some of the anonymous respondents’ comments. A DFM said: “I will not give a name of the fund, but in many situations, I have been very suspicious of how a fund manager justifies the ownership of individual holdings. For example, ‘I own BP because it is better than Shell‘ – regardless of the fact, neither should comfortably sit in the fund in the first place.”
Another fund selector said: “I’m not prepared to disclose specific names, but a number of fund managers have recently suggested that ESG screening has always been part of their investment process, however on closer inspection their investment process is light green and negative screening at best.”
Regulators appear to be cracking down on greenwashing with BNY Mellon most recently being fined by the US regulator for saying all investments in some particular funds had undergone an ESG quality review, but this was not always the case. The Securities and Exchange Commission is also pushing ahead with legislation regarding fund labelling and disclosure, while Europe is working on its green taxonomy, putting in place the Sustainable Finance Disclosure Regulation last year, and the UK’s Financial Conduct Authority also looking at ESG fund labels.
Head of managed portfolio services at RSMR, Stewart Smith (pictured left), said he understood why greenwashing concerns had increased: “In recent years we’ve been approached to look at an increasingly large numbers of funds with an ESG mandate. We have been including ESG factors within our fund research since 2008, introducing RSMR Responsible ratings in 2012. While our accumulated experience and knowledge helps us to focus, we totally sympathise with the concerns felt by other researchers and fund buyers in the industry.”
