Time to get smart about greenwashing

The growing awareness of environmental, social and governance (ESG) issues in recent years has fuelled the rising popularity of related products, with investors pouring billions of euros into the strategies they believe will have a positive impact on the world around them.

One of the reasons for the strategies’ popularity across many different investor types has been their ability to align portfolios with investors’ personal beliefs. However, the investment environment has become a lot more nuanced in recent months; the traditional broad ESG definitions that have remained largely unchallenged may no longer be appropriate in some circumstances. But ESG-focused managers operating outside the traditional definitions could face accusations of greenwashing.

For example, the Russian invasion of Ukraine has highlighted several shortcomings of the negative screening methods popular with some ESG managers.

The defence industry has traditionally been excluded from ESG strategies due to its perceived negative social impact. This means fund managers have been prevented from investing in the sector at a time when it is benefiting increased spending by governments – despite its role in safeguarding democracies.

Furthermore, as European economies look for alternatives to Russian oil & gas, ESG investors are prevented from investing in US and European providers that could prevent shortages.

Greenwashing exposed

As the ESG investment environment has become more complex, asset managers have understood the importance of tackling issues and meeting the demand for solutions. They are continuing to pour resources into their strategies, developing new technology and methodologies.

But as more investor money has flowed in ESG strategies, concerns about the potential for greenwashing have also grown.

It has become clear that the investment industry must tackle the issue of greenwashing, particularly as authorities in Europe and the US have started to put the investment industry under greater scrutiny and impose more onerous disclosure requirements.

For example, allegations of greenwashing at Germany’s largest asset manager, DWS Group, led to chief executive Asoka Woehrmann stepping down in June as police raided its offices and those of majority owner Deutsche Bank¹. Meanwhile, data provider Morningstar cut more than 1,200 funds representing assets of over $1.4trn from its list of sustainable European funds over greenwashing concerns, demonstrating the immense scale of the problem².

The challenge with regulation

Authorities are attempting to develop a regulatory framework that can protect investors, build trust, and support the growth of this booming sector of the industry. However, the lack of progress over ESG definitions and standardised methodologies is opening the door to investment strategies nominatively ESG but hardly justified as really sustainable.

The lack of standardisation across the industry has created an environment where there are competing definitions for what qualifies as an ESG investment.

Although the EU has begun to pay more attention to the potential risk of greenwashing in the funds space, launching Sustainable Finance Disclosures Regulation (SFDR) last year to create greater clarity, there is still some way to go.

Another area that is being impacted by regulatory shortfalls is the quality and comparability of ESG data, which often results in providers issuing very different scores for the same companies. Allowing managers to choose between these ratings could also lead to instances of greenwashing. With a wide range of rating providers, there is little to stop unscrupulous asset managers from selecting the data that best justifies their investment decisions.

The limitations of some ratings were also exposed more recently following a scandal involving French care homes group Orpea, which scored highly with many rating providers under ESG criteria for its societal benefits and alignment with several of the UN’s Sustainable Development Goals. However, the French investment industry was rocked when allegations of mistreatment and cost-cutting at Orpea care homes were published. It is now the subject of investigations, and many asset managers have sold out of the stock.

Such examples illustrate why asset owners need new tools to assess true ESG attributes of the funds in their portfolios.

Enhanced portfolio monitoring

It has become increasingly clear that asset owners require smart tools that provide more detailed and in-depth portfolio monitoring to help them fulfil their ESG goals. Accurate ESG monitoring is not just important from a risk perspective; more granular analysis of their holdings can also help asset owners make more informed investment decisions.

At Societe Generale Securities Services (SGSS) we have developed the capacity for asset owners to aggregate all their positions with different managers, whether they are held under administration with us or not. This allows our clients to compare ESG performance and data more easily.

Our Analytics & Reporting solution collects data from internal and external sources, cleans and aggregates it where necessary, detects corrupt or inaccurate records, and enhances it with look-through information that allows clients to retrieve underlying holdings if required.

One of its key features is the ESG performance monitoring. Via its reporting offer in partnership with MSCI, SGSS provides an overview of the ESG performance of portfolios as well as key indicators related to CO2 emissions and additional analyses including a benchmark index comparison feature.

Analytics & Reporting also helps to identify ESG performance drivers and negative contributions and corrects errors where necessary. SGSS ESG Reporting Service offers flexible delivery frequency with quarterly, monthly or even daily delivery of reports via different media: SGSS web tool, e-mail or FTP³.

We believe that it offers an enhanced level of oversight for asset owners and helps to level the playing field for fund distributors, by comparing performance between different strategies.

Although regulators are continuing to develop a framework that protects investors and encourages best practice among asset managers, the road is long to be able to rely on a common set of definitions that would restrict interpretations of sustainable investments. That is why we believe smart tools such as our Analytics & Reporting solution offer asset owners an efficient dashboard to monitor their ESG investments.

Article published in Funds Europe.

Alexis Scheidecker, ESG products specialist, Societe Generale Securities Services