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Regulators Will Make 2021 The Last Year Of Financial Product Greenwashing

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Regulators Will Make 2021 The Last Year Of Financial Product Greenwashing

Greenwashing is not a recent phenomenon – the term was originally coined in the 1980’s to reflect firms making unsubstantiated claims on sustainability practices in an attempt to gain market share. However, since 2019 there has been an exponential increase in greenwashing at both the individual firm level and at an aggregated investment fund level.

Asset managers are scrambling to meet the ever-increasing demand for ESG-aligned investments with ESG investing accounting for 33% of total US assets under management. However, there are serious concerns surrounding the extent of ESG focus within the plethora of ‘ESG’ funds. The Financial Conduct Authority (FCA), the financial regulatory body in the UK, recently published a letter addressed to fund managers, outlining the fact that ESG funds are not living up to their PR and advertising claims.

Legal & General Investment Management, a UK based investment manager with 2,000 employees, has been strongly accused of greenwashing with the ‘LGIM ESG China CNY Bond Ucits’ ETF. The fund consists entirely of debt issued by the Chinese government and three policy banks, which are owned by the Chinese State – these holdings are equivalent to those in non-ESG funds such as ‘iShares CNY Bond Ucits’ ETF, differentiated only by minor changes in the portfolio weightings. Basically, the fund does not meet our expectations of an ESG fund.

Governments are in the midst of a crack-down as they are acutely aware that greenwashing is a major roadblock in allowing investment flows to help push economies towards the country specific sustainable targets. The European Commission has been the first mover with the creation of the EU Taxonomy Regulation in July 2020 - enabling a transparent assessment of either businesses or financial products on the extent of their sustainability. Further developments are expected by the Board of the International Organization of Securities Commissions (IOSCO) and the SEC.

As the extensive greenwashing epidemic begins the path to eradication - financial ESG solution providers will need to enhance their propositions to align with greenwashing mitigation regulations. Currently, the market for ESG scores for equities is unregulated and unsupervised with a lack of standardisation across scoring. Over the next 12 months, ESG scores for equities providers will need to tackle the issue of transparency of methodologies – to ensure investors have visibility over which firms are truly sustainable and climate friendly (See Smart Innovators: Climate & ESG Financial Markets Solutions).

Sam Renshaw

Industry Analyst

Sam is an Industry Analyst in the ESG & Sustainability practice. His current research agenda focuses on ESG solutions across financial markets including ESG information providers and sustainability consulting. Sam joined Verdantix in 2021, and previously worked at Moody’s Analytics as part of the Buy-Side Solutions team. He holds a BSc from The University of Nottingham in Economics and is a CFA Level 2 candidate.