Under the SEC’s proposals, fund managers should disclose the ESG factors they consider and the specific strategies, criteria and data they use to invest in accordance with them. They should also disclose metrics such as the greenhouse gas emissions of their portfolios and their annual progress towards their ESG goals.
In Australia, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission have both shown increasing interest in ESG-related disclosures by fund managers and companies, ASIC having launched an investigation into greenwashing by pension funds and managed funds last year and the ACCC’s warning that companies falsely promoting their green credentials would face a crackdown.
Even before the raid on DWS, there had been other instances of regulatory actions related to ESG disclosure issues.
Last month, the SEC fined Bank of New York Mellon Corp $1.5 million over misleading claims about its ESG funds.
The commission also took action against Brazil’s Vale, alleging the iron ore mining giant made false and misleading statements about dam safety in its sustainability reports and other ESG disclosures.
Ensuring that what ESG labeled funds actually do is what they say they are doing is not a simple task, given that there is no consensus on what constitutes ethical investing and that there are few benchmarks at this stage to test whether fund behaviors are consistent with a very wide range of ESG labels.
It is the dual appeal of funds that claim to do good and companies that meet ESG criteria and claims of superior performance that is driving the growth of the sector.
Is an ethical investment one that has no carbon footprint and ticks all the boxes of good governance or could the category also include, for example, a mining company with a clear and measurable commitment to reducing its carbon emissions and those of its customers?
An example could be Shell which, with the help of a court ruling, has pledged to cut its and its suppliers’ emissions by nearly half by 2030 from 2019 levels. shunned or supported by ESG investors?
In practice, companies like Shell are rejected by some investors on ESG grounds, but embraced by others. ESG investment frameworks are broad and vague.
Likewise, it is difficult to test the sector’s claims of superior performance – claims that have helped, along with heightened investor interest in ethical investing, to generate massive inflows of funds to ESG managers. Bloomberg’s intelligence unit has predicted that the sector will have about $50 trillion in funds under management by 2025, or about a third of the funds under management globally.
It’s the dual appeal of funds claiming to do good and supporting companies that meet ESG criteria and claims of superior performance – end investors can both feel good about themselves and be rewarded for it – that drives growth. of the sector.
Whether that’s because the underlying companies that tick their boxes are inherently better performing or whether the external environment in recent years has favored the types of stocks that generate fewer ESG issues (low-carbon tech stocks have done spectacularly until very recently) and whether the same investment performance could be achieved by non-ESG labeled funds with good asset allocations and stock selections is highly questionable.
What regulators apparently won’t debate, however, is stepping up efforts to ensure that funds claiming to be ESG investors can demonstrate that they have the systems and strategies in place and can provide the metrics to support and substantiate these assertions.
It’s not unreasonable. What funds actually do should align with their marketing. For funds and their regulators, however, given the extent of gray areas in definitions of ESG investing, it might prove easier, or at least harder, when said than done.
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