Podcast

IQ-EQ Masterclass: Responsible ESG reporting and how to avoid greenwashing

24 May 2021

IQ-EQ’s Hugh Stacey defines greenwashing and shares his insight into how to recognise it. He also outlines how regulators and investors are taking action and what asset managers can do to avoid the greenwashing trap.

Hugh Stacey is the Executive Director of IQ-EQ Investor Solutions, which is a division dedicated to servicing the private markets portfolios of institutional and private investors with the latest technological platforms. Investor Solutions is powered by IQ-EQ Cosmos, our proprietary investor reporting tool that delivers real-time data and analysis across multiple investments, portfolios, funds and asset classes. It includes dedicated ESG dashboards enabling reporting against key ESG criteria and global sustainability benchmarks. 

Listen to the IQ-EQ podcast on

Transcript

Spoken content

0:23

Hi everyone, thanks very much for attending today's Masterclass on Responsible ESG Reporting, How to Avoid Greenwashing, with me, Hugh Stacey, Executive Director at IQ-EQ Investor Solutions.

0:36

So, let's start: What is greenwashing?

0:41

According to the Financial Conduct Authority of the UK, greenwashing amounts to marketing that portrays an organization's products, activities or policies as producing positive environmental outcomes when this is not the case.

0:57

Indeed, as ESG investing gains momentum, greenwashing has become a hot topic.

1:03

with growing regulatory pressure and stronger public interest coming to bear on this scourge.

1:09

In the simplest terms, greenwashing is said to take place when firms and funds share misleading claims about their products or ESG credentials.

1:19

It misdirects capital away from the goals and preferences of the investors who choose sustainable funds.

1:27

Greenwashing can be best tackled with transparent and standardized ESG data, reporting and disclosure.

1:35

So, how do we identify greenwashing?

1:41

I think the best way to do this is looking at a few case studies.

1:44

The first case study, here, a group of investors worth a trillion dollars, suspected a leading global bank of greenwashing, as it continued to fund coal projects, despite pledging to go carbon neutral.

2:00

An independent watchdog, which looked into the matter, found that the bank pumped an additional billion dollars into fossil fuel companies in the four months leading up to its carbon neutral announcement.

2:14

Case study two is all about misleading titles.

2:19

Investors must be aware of funds that have misleading titles and go beyond titles to the individual components of the fund to understand if the underlying industry is green or not.

2:31

In this interesting example of a misleading Fund Title it included the following, ESG Impact Index Fund.

2:40

However, there was an allocation of 1.59% in the Fund, in a company which was in the ‘Carbon Majors’ report list as it had the fifth highest accumulated GHG emissions between 1988 and 2015.

2:57

So even though the company did not appear in the top 10 holdings of the fund, by delving deeper into the allocations, investors found that the title didn't match the underlying holdings.

3:08

Therefore, it shouldn't have been marketed as an ESG product.

3:13

So, accusations of greenwashing exposes parties to compliance risk, reputational risk, as well as financial risk by the loss of shareholders or investors.

3:25

So, how do we prevent greenwashing?

3:30

What are regulators doing to prevent greenwashing? So the EU has introduced a Sustainable Financial Disclosure Regulation.

3:38

The SFDR aims to enhance transparency regarding integration of ESG criteria into investments, decisions, and recommendations, and thereby preventing greenwashing.

3:53

The SFDR requires various financial institutions, including asset managers, to disclose at an entity and product level, how they build sustainability into products they provide and how products branded sustainable achieve their objectives.

4:09

The requirements came into effect on 10 March this year.

4:13

The EU also introduced a Taxonomy Regulation.

4:18

This Regulation is establishing the criteria to determine if an activity is sustainable or not, and avoid greenwashing of investment products by preventing them from being labelled as sustainable when they're not.

4:33

Most of the provisions will apply from 1 January 2022.

4:37

This also imposes some NC level disclosures for listed entities.

4:44

There are other regulations including UCITS, AIFMD and MiFiD II, all of which are being updated to take account of sustainable measures, such as requirements for asset manages to build sustainability related practices into their due diligence processes.

5:01

There's also the regulatory technical standards, the RTS.

5:06

These have been updated to include more detail about some of the disclosure requirements mentioned above.

5:12

These were released in early February and have been submitted to the EU Commission for approval - a process that is expected to take three months or so.

5:22

There's a lot of going on in regard to what regulators are doing to help prevent greenwashing.

5:28

So, what are investors doing to prevent greenwashing? Investors are increasingly adhering to due diligence best practices to avoid greenwashed products. So, they're looking behind misleading fund titles by delving deeper into the marketing material, and what's behind it.

5:45

They're checking the fund allocation percentage per industry to identify undesired industries and cross-checking them with the individual companies’ sustainability performance.

5:56

Performing in-depth holding analysis by going beyond the top 10 holdings.

6:02

Meeting the asset manager’s ESG team to understand that process and where they sit within the company. Finding out if the firm has a formal commitment or mission statement regarding ESG investing.

6:15

Finding out if the firm has dedicated ESG investment professionals, including portfolio managers/analysts. Asking about the firm's ability to leverage ESG data and analytics.

6:27

Enquiring about the firm's policy and track record when it comes to shareholder proxy voting and engaging directly with the company management and directors.

6:37

Also, identifying and validating the asset managers’ source of ESG data to find out if it's a third-party data that carries the risk of being stale.

6:47

Or if it being duly backed by an in-house team, that conducts the proprietary ESG assessment by collaborating and holding meaningful dialogue with portfolio companies.

6:57

So, there are a lot of things people can do to help prevent greenwashing.

7:02

So, what can asset managers do to prevent greenwashing?

7:07

Firstly, they can avoid making misleading or generic claims.

7:11

In 2012, the US

7:13

Federal Trade Commission, the FTC, created the Green Guides, a voluntary guideline designed to help marketers avoid making misleading claims about their environmental practices.

7:27

The guide cautions marketers not to make broad unqualified claims that a product is environmentally friendly or eco-friendly.

7:35

as studies have found these claims difficult to validate. Secondly, they can identify the right metrics and share corresponding data.

7:46

The ESG investment world faces a key obstacle in the form of a scarcity of regulations governing ESG measures.

7:53

The risks that companies must disclose an inconsistent nature or ESG communications.

8:00

However, investors are increasing incorporating ESG data into their decision making.

8:06

In this light, companies that seek to do right by investors must own their data, and take the lead on communicating this data with investors and stakeholders by ESG reporting.

8:18

Thirdly, they can undertake responsible, consistent and transparent ESG reporting.

8:24

While reporting is voluntary, most companies are making efforts to provide these reports to satisfy a growing demand for ESG data.

8:33

As more firms issue ESG reports, disclosures are expanding for the provision of simple financial parameters, which includes metrics that track sustainability and corporate social responsibility.

8:46

So how can we help?

8:50

Well, here at IQ-EQ, we seek to guide asset managers, corporates and private investors alike, to generally respond to the demands of ESG investing.

9:02

Our investing reporting tool, IQ-EQ Compass, incorporates a full suite of ESG services, duly supported by a powerful technology platform that, via dashboards, enables managers and investors to navigate, monitor and analyse their ESG KPIs and are tailored to their specific needs, or by following the World Economic Forum ESG Metrics.

9:26

So, in summary, I hope that today's Masterclass has given you an insight into what is greenwashing, how to identify it, and how it can be prevented.

9:36

If you have any questions, please feel free to go to our website or drop me an e-mail.

9:42

Thanks very much for your time.

9:46