Week 11 - ESG & Capital markets: Greenwashing by investors

Question 1

What is greenwashing by investors?

Answer 1

The practice where investors or financial institutions make MISLEADING or DECEPTIVE CLAIMS about the environmental friendliness, sustainability, or
ethical standards of their investment products, funds, or activities.

Question 2

6 reasons why investors greenwash

Answer 2

1. Attract FUND FLOWS {to increase AUM, which increases the compensation of mutual fund managers}
2. Charge HIGHER FEES, eg. mgmt fees by differentiating themselves
3. Meet regulatory standards
4. Enhance REPUTATION
5. Gain competitive advantage and market share
6. Mask poor performance

Question 3

4 ways that investors (shareholders/lenders) greenwash
- some overlap with greenwashing methods by firms

Answer 3

1. VAGUE or misleading NAMES
   » cannot tell if the funds are actually sustainable
   - sometimes can figure out what the funds do by reading the fund prospectus
   - is repurposing greenwashing? in some cases, asset managers repurposed a fund purely for MARKETING purposes
2. VAGUE terminology or promises
3. HARD-TO-VERIFY PLEDGES
   eg. PRI, Net Zero Asset Managers initiative, Climate Action 100+
   » not strong enforcement standards to ensure their signatories follow what they’re supposed to do
4. OVERSTATING CLAIMS of greenness
   eg. BNY Mellon got fined by SEC for overstated claims

Question 4

5 ways to spot greenwashing

Answer 4

1. Read fund prospectus - investment objective and strategy
2. Analyse portfolio holdings of firms in the funds
3. Read voting guidelines
4. Read annual report on engagements
5. Look at fund employees
   - do they have a stewardship team?
   - do their fund managers/employees have relevant ESG experience/expertise? + board diversity

Question 5

What does Academic evidence suggest about greenwashing & ESG fund investment?

Answer 5

1. ESG funds do NOT always invest in firms with better ESG scores
2. ESG funds do NOT improve portfolio firms’ ESG scores in the future

Does this necessarily suggest greenwashing?
- inconsistent with negative screening or positive screening
- but funds might be using Active Engagement as their engagement (they invest in poor-ESG firms and make them better, which might take a while & might cost a lot initially)

Question 6

3 examples of legislation/regulation targeting investor greenwashing

Answer 6

1. EU SFDR
   - funds must disclose how ESG enters into investment process and what ESG metrics they use
2. UK SDR
3. SEC’s amended Names Rule
   - if a fund uses “sustainable” in its fund name, 80% of its assets should be invested in sustainable assets {but no definition of sustainable assets}

Question 7

3 potential pros & 2 cons of Anti-greenwashing regulation

Answer 7

Pros
1. some regulation is better than no regulation
2. there’s an EXTRA LAYER OF SCRUTINY for funds to avoid being viewed as greenwashing
3. similar reg.s worldwide provide a LEVEL PLAYING FIELD within and across countries

Cons
1. is there enough ENFORCEMENT, eg. SEC fines, name and shame, reputational damage
2. funds are worried about IMPLEMENTATION (eg. how to classify between Article 8 vs Article 9 funds) & ENFORCEMENT COSTS
» small firms that cannot afford costs would choose to delist and go private