Investment

Chart of the Month – Stay away from greenwashing!

by Marie-Caroline Fonta

Stay away from greenwashing!

 

European Sustainable Fund Flows Compared with Conventional Fund Flows ($ Billion)

Greenwashing is quite popular lately. But, what does it really mean? Here is a definition from Investopedia: “Greenwashing is the act of providing the public or investors with misleading or outright false information about the environmental impact of a company’s products and operations. In addition, greenwashing may occur when a company attempts to emphasize sustainable aspects of a product to overshadow the company’s involvement in environmentally-damaging practices”.

Greenwashing is everywhere: in the automotive industry, in fast fashion, at the next COP27 meeting according to activist Greta Thunberg and, as far as we are concerned, in finance. The world of finance has evolved over the last few years. The social and environmental requirements of the younger generation are guiding investor’s choices. We also have climate emergencies. Regulations and governments are acting. There is no need to demonstrate it anymore, we all have to participate at our level.

According to Bloomberg Intelligence Regulations estimates, in the booming ESG market, assets are expected to exceed $53 trillion by 2025. In Europe, the Sustainable Finance Disclosure Regulation (SFDR) aims to eradicate greenwashing by mandating greater disclosure.

Looking at inflows into sustainable funds, they have increased since 2020. This year, against a backdrop of rising interest rates, inflationary pressures and conflict in Ukraine, sustainable fund flows in Europe remain higher than those of conventional funds. Interestingly, asset managers have significantly reduced the number of new ESG funds they are launching. The reason is the tightening of the regulatory environment, which makes it more difficult to pursue environmental, social and governance claims.

Market participants have to adapt constantly and face certain challenges. Wealth managers need to select Environmental, Social, Governance (ESG) financial products that are compatible with their clients’ preferences. In this blur, they also need to be aware of the different terminologies and strategies (Exclusion, Integration, Negative screening, positive screening, impact…).

Asset Managers are subject to mandatory disclosure requirements as a result of product classification. Do these products integrate ESG risks, promote ESG criteria, have an environmental or social objective? At the global level, the non-homogeneity of regulations and definitions is a handicap. At the European level, the regulations and obligations in terms of disclosures are a source of confusion. Investors seek more precision in terms of frameworks and limits and want standardized criteria.

Another issue is ESG data and its access. By announcing an ESG approach, managers expose themselves and their company to a reputational risk. An apparent solution, beyond launching new products, is to adapt current products to new regulatory requirements. In this process, it is important to remain humble.

Investors, financial analysts and asset managers have a key role to play in the transparency of the data but also through the pressure they can put on companies, for example, on the importance of Scope 3 for the calculation of greenhouse gas emissions.

One thing is certain today when selecting a company or a fund that communicates on its ESG approach, one must: “Trust but verify”.

 

 

 

 

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer.  Additional information is available on request.

© NS Partners Group

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Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
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