21 Apr Invest in our planet: Avoid greenwashing
“Invest in our planet” is the 2022 Earth Day theme. While sustainable environmental, social, and governance (ESG) funds and investment products have rapidly grown in popularity, there has been a sharp increase in greenwashing, or making marketing information appear more environmentally friendly. Financial advisors must be careful to avoid this trap since it can cost them their hard-earned investors’ trust. Here are some tips.
Earth Day has been celebrated yearly on April 22 since 1970. This year is dedicated to driving environmental change by focusing on business and political climates to propel transformative change for people and our planet. It calls on everyone – businesses, governments, and citizens – to be accounted for, and for everyone to be accountable.
The majority of investors took notice by integrating environmental, social, and governance aspects directly into their investment policies. As a result, sustainable ESG funds have rapidly grown in popularity and have finally debunked the long-held belief that returns must be sacrificed to invest ethically or sustainably. In fact, research tells us quite the contrary – investing ethically or sustainably enhances returns.
Despite the increasing awareness around sustainable, responsible, and ethical finance, the sector has come under scrutiny of late. More and more investors are concerned by the possibility of greenwashing.
The cost of greenwashing
While greenwashing is nothing new, it has increased sharply in recent years along with consumer demand for all things environmentally friendly.
This unfortunately all too common practice is a deceptive tactic that uses green PR and green marketing to persuade the public that a business’s products, actions, and policies are environmentally friendly. Ineffective external monitoring and verification on the part of regulatory agencies is a key contributor to the rise of greenwashing, as is a lack of standardization.
Indeed, greenwashing is a growing problem. Research from Quilter, a UK leading wealth management company, reports that 44% of investors today admit greenwashing is their biggest concern when it comes to ESG investing.
Unsurprisingly, one of the most important consequences associated with greenwashing is the irreparable damage that can be done to a client’s trust towards their advisor. And the ultimate consequence is losing their business.
To avoid greenwashing, companies can pursue environmental sustainability certification via independent verification of their green claims. However, this is expensive, and the process must be repeated every few years. This makes checking on the individual companies in which a fund is investing particularly tricky.
Tips to avoid greenwashing
Last week, the Canadian Investment Funds Standards Committee released a second draft of its Responsible Investment Identification Framework for mutual funds, ETFs, segregated funds, and pooled funds.
The purpose of this document is to develop a pragmatic identification standard to guide Canadian investors and their advisors and to help investors and fund manufacturers align on common language and definitions. The framework addresses six issues about ESG: integration and evaluation, thematic investing, exclusions, impact investing, engagement and stewardship activities, and best in class.
Furthermore, an International Sustainability Standards Board was recently created that should help regulate ESG investing in the future. However, for the time being, there is much work to be done before we can expect complete transparency in ESG funds and investment products.
Though globally accepted standards for ESG metrics may still be a while away, there are ways to avoid greenwashing without compromising your investors’ financial returns, and ultimately allowing you to maintain your client base.
Investment advisors and financial planners must help their clients wade through a product’s brochure and prospectus. They must also walk them through the exact approach a fund or investment product is taking to ensure sustainability, so that the client can assess whether or not it lines up with their ESG aspirations. This can be an extremely time-consuming task.
Fortunately, portfolio management firms and individuals have a range of functionalities at their disposal. They can speed up the process by providing direct access to ESG data, scores, and research on individual funds and the companies they invest in. Investors can quickly assess the true sustainability of a fund and its performance to date, so that they can make informed investment decisions.
ESG investment management solutions
It is an undeniable fact that FinTech has completely transformed the wealth management industry. This includes streamlining the ESG investing and analysis process for advisors. Indeed, new and innovative FinTech software, tools, and services allow financial advisors and money managers to navigate the complexity of ESG investing to precisely measure the sustainability and societal impact of investing in a given fund or investment product.
ESG investment management solutions can help advisors pinpoint the best ESG opportunities for their clients and optimize their investment returns, whether for shareholders; to help advisors better manage ESG investments; or to help clients navigate the complexity of ESG investing.
ESG management solutions today also provide data that allows wealth advisors to incorporate a range of ESG factors into the investment workflow, including portfolio analysis, equity research, screening, and quantitative analysis. This enables wealth managers to screen a large percentage of the total global market against predetermined ESG metrics on a client-by-client basis and thus develop an investment strategy that best caters to their clients’ needs, sustainability priorities, and long-term investment goals.