NEWS & VIEWS
FSL’s Chain Mail is a regular blog containing links to news articles that we think are worth sharing. In this edition, we explore the issue of ESG greenwashing in the financial services industry and what investors are looking for from ESG.
As ESG (Environmental, Social & Governance) investing gains in recognition and adoption across the financial services industry, so do accusations of greenwashing. Greenwashing can be defined as “an attempt to make people believe that [a] company is doing more to protect the environment than it really is”. And can also be applied to funds being promoted as more ‘ESG’ than they really are. The practice has been subject to intense scrutiny, yet efforts to combat it are also widespread.
The UK’s Advertising Standards Authority (ASA) recently banned two HSBC adverts due to greenwashing. The ASA justified its ruling by noting that HSBC’s environmental-focused adverts did not disclose its emissions, nor information about its fossil fuel projects.
The momentous step signals to other large financial institutions that real ESG statements must be supported by genuinely embodying ESG within the organisation.
New regulations for greenwashing
The Financial Conduct Authority (FCA) similarly supports efforts to combat greenwashing. Their newly published Sustainability Disclosure Standards Consultation Paper providers standardised ways to measure funds. The paper provides three labels (Sustainable Focus, Sustainable Improvers, Sustainable Impact) that funds can use, should they meet the individual criteria, to ensure consumers are confident in their ESG investments.
Fund managers should therefore be familiar with the new labelling system ahead of its anticipated adoption in June 2024, to guarantee that they are in alignment with the regulation.
While this is a welcome step in protecting consumers, there is a need for more stringent regulation that allows funds to understand which of their assets can fall into these label categories. The International Sustainability Standards Board (ISSB) aims to provide this, recently announcing that companies will be required to include their Scope 3 emissions (indirect emissions from the supply chain of a company’s product/services) in their emissions disclosures.
This provides funds with a fuller picture of a company’s ESG activities, allowing them to categorise each firm more accurately.
What investors want in the future
The future of ESG is undoubtedly interlinked with growing regulation. Yet, what underpins these new rules is not only a desire to progress individual ESG factors, but also to protect and satisfy the consumer. Funds benefit from understanding what investors want in relation to ESG, which can differ based on a consumer’s awareness of ESG. Some consumers may want to better understand their own ESG beliefs, some may go further in wanting to know what assets a fund excludes from its list, and some may even desire a more robust understanding of the ESG data and how ratings are calculated.
Funds and data/rating providers alike must therefore be in tune with the consumers’ needs to both provide a better service and to ensure their ESG practices are effective.