Amidst increasing pleas for actionable plans and material results, greenwashing remains a major concern for asset managers, and the possible legal and reputational damages to their funds and businesses if the market changes are unignorable.
While some positive changes are underway - capital investment in renewables was set to reach $494 billion this year, which was “outstripping upstream oil and gas at $446 billion USD” for the first time, a recent Rystad Energy report noted - greenwashing remains a serious topic.
One key facet of these greenwashing fears comes from The EU’s Sustainable Finance Disclosure Regulation (SFDR), which have been seen as easily manipulated by some and could lead fund managers to murky waters. SFDR’s currently outlines protocols for Article 6, 8, and 9 funds to prevent greenwashing and make sustainability goals and claims more transparent. However, given the wide berth allowed by the SFDR definitions – especially for Article 8 funds – some are beginning to wonder if greenwashing is still an effective term for the current market.
For fund operators, this means that regulations could soon get tighter and more specific, as managers search for better systematised processes and concrete data. Moving away from a focus on greenwashing, means those in back-office positions should focus on step-by-step protocols and metrics.
Measurable data is key
One element of this fear is due to the 2022 Scorecard on Insurance, Fossil Fuels, and the Climate Emergency, which recently noted that the Partnership for Carbon Accounting Financials (PCAF) is collaborating with the Net-Zero Insurance Alliance (NZIA) to draft a protocol that will strictly measure insured carbon emissions. This data will be crucial in helping to set emission reduction targets by January 2023.
“[Metrics] distinguish credible actors from institutions that use their net zero commitments to greenwash business as usual.”
This measurement – and others like it – is important because it adds specificity to the greenwashing idea and gives clear guidelines by which to hold companies responsible for their investment strategies. “They distinguish credible actors from institutions that use their net zero commitments to greenwash business as usual,” the report said. Fund operators will need to be aware of these shifting expectations and move their business strategies from public statements to accessible and transparent numbers.
This trend is also relevant due to the new EU Taxonomy Regulation for sustainable activities, which is designed to guide the EU economy’s transition as it plans to meet European Green Deal objectives. The Green Deal is a set of proposals that aim to accomplish tasks set out by the Paris Agreement – including the ambitious 2050 climate-neutrality target.
Focus on actionable solutions
This is a critical shift as there are often difficulties in mobilising definitive action around greenwashing accusations. It’s a difficult term when framed as an intention-based issue, said Max Boucher, Senior Manager, Research and Engagements, Biodiversity, FAIRR. The concept doesn’t adequately cover the actions of large companies that have many business divisions and offshoots.
“We need to focus more on metrics and less on intentions. Calling someone dishonest isn’t an actionable solution.”
Confluence around ESG agendas has proven difficult to attain, but necessary. This is because it is “hard to align everything on the asset management side of a business,” Boucher said. The sentiment at the group level can be tricky to streamline, which means it shouldn’t be the end-all concern. Instead, “we need to focus more on metrics and less on intentions,” he added. “Calling someone dishonest isn’t an actionable solution.”
However, fund managers should be aware that there is no secret metric that will magically do the trick. “There is no perfect tool,” Boucher said, stressing the importance of immediate action. “There isn’t an advanced metric we’re missing. We have to do what we can with the data we have right now, instead of waiting. Frameworks will evolve significantly in the coming years.”
Ultimately, It’s about effort and streamlined processes that can be easily adapted as research develops. Otherwise, fund operators will remain behind the curve in terms of regulations – losing profits as they scramble to patch reputational damage after the fact.
Clear processes and commitments
A 2021 Deloitte report, ‘ESG Data Management and Analytics’, explained that effective ESG data and data management is enabled by iterative processes. These procedures must be backed by company resources – time, energy, and money – and a “continuous commitment to improving skills, competencies, and ways of working.”
“Meaningful insights and impacts cannot be delivered by a core ESG-team alone, but require the commitment of the entire company, partners, suppliers, and customers.”
Cultivating the mindset that data is key is of the utmost importance to fund operators who want to keep up with this changing landscape. As is often the case, collaboration is key: “Meaningful insights and impacts cannot be delivered by a core ESG-team alone, but require the commitment of the entire company, partners, suppliers, and customers,” the report continued.
This all shows that the possible consequences of being found to be undertaking efforts to greenwash – even inadvertently – remain high and could have huge reputational damages even if the fiduciary results are negligible. A recent Harvard Business Review study found that customers are usually aware of gaps between a company’s stated goals and implementation, which “triggers perceptions of corporate hypocrisy [and] affects the customers’ experience with the product itself.”
Disconnects between words and actions harm brand reputation, decrease brand loyalty, and hamper purchase intentions and repeat purchases. Fund operators need to be hyper-aware of this phenomenon, which could mean more administration checks in a process that is already cumbersome. This could lead to further innovation as managers look for ways to streamline processes.
All of this means that processes could be most effective if they begin with setting a basic data foundation that all stakeholders can agree upon, and later increasing technological complexity to generate results. Insights without actions – and eventually proof of success – are meaningless, history shows, and can even result in backsliding.
Fund operators who don’t get on board now might find themselves in a compromising position down the road. Even as the focus moves to data and procedures, greenwashing is still on the industry’s mind – and while it might be profitable in the short term, it could be a painful mistake in the long term.
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