Firms will need to show more data for ESG
ESG funds are in demand, but firms face accusations of greenwashing and the regulators are starting to lose patience.
ESG has gone mainstream. Almost every business now stresses its commitments to sustainability and meeting the Paris Agreement climate goals. Even so, some are more serious than others. Greenwashing remains a significant problem, but as the recent example of Legal & General shows, it’s becoming more difficult than it used to be.
Legal & General have denied greenwashing in relation to a fund that was said to have invested solely in securities issued by Chinese government-owned entities with ESG principles. The accusations came in a blog from wealth manager Alan Miller, Chief Investment officer of SCM Direct, who wrote:
“When it comes to ESG funds – Environmental, Social and (corporate) Governance, it is hard to be shocked by the brazen product sleight of hand of some fund management companies, who are dressing up funds in an ESG cloak, covering up that there is really very little difference to their traditional, non ESG funds.”
A questionable track record on climate change
His criticisms stem from the Chinese government’s questionable track record on climate change, and that they hold the same bonds as non-ESG funds. L&G argues that it tilts between bonds to reflect their respective ESG scores and that it uses active engagement to improve the ESG footprint of the fund compared to similar investments in other countries. This reasoning of using engagement to foster change is one which divides opinion. There are those, such as Miller, who will regard it as a relatively weak excuse to dress up a non-ESG fund with greener credentials, while others will contend that engagement with China is the only way to foster lasting improvements. A fund may not have the same ESG score as some of the leading ESG funds on the market, but if it can encourage companies and governments to engage in sustainability, then it is still having a positive impact.
More ESG data is key
Whichever argument you side with, data will be key. In order to back up claims and earn trust, Legal & General would have to show more evidence of their engagement on ESG matters. Other funds will also need to show more detail on how they believe their funds earn their green credentials. This is not just an issue for potential investors. Regulators are getting in on the act. The FCA has already complained about the number of applications it receives which ‘do not bear scrutiny’. In a Dear CEO letter, they set out their rules and expectations for ESG and sustainable investment funds.
“We will continue to scrutinise and challenge firms on their fund strategies and disclosures and to ensure that documentation submitted to us for authorisation meets our regulatory requirements.”
The ESG market is booming. Experts expect demand to double over the course of 2021 driven by awareness of ESG risk as well as enthusiasm for sustainable products. However, the market is facing a defining moment. Firms that make questionable ESG claims undermine trust in the sector and can compromise prospects for future growth. The regulators have signalled their intention to tighten their scrutiny and investors are demanding more information.
Firms such as Legal & General that wish to be leaders in sustainability will have to do more to be clear in their metrics and show more evidence regarding their commitment.
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