As asset managers look to meet market demand for Environmental, Social and Governance (ESG) criteria-based products, many are coming under close scrutiny by authorities, the media and investors on the lookout for cases of “greenwashing.” For firms seeking to capitalize on the burgeoning ESG market, managing reputational risk will be critical.
Firms need to keep watch on two fronts. First is the area of ESG integration. When asset managers sign up to the Principles for Responsible Investment (PRI), they are committing to integrating ESG factors across all processes and asset classes. The danger is that firms inadvertently overstate their ability to use ESG criteria to manage assets, when in fact the capabilities are simply not in place to measure ESG for specific asset classes.
The second area where accusations of greenwashing may occur are in firms’ products. While there are no doubt cases where firms are deliberately gaming the system to leverage interest in ESG products without fundamentally changing their portfolio, most firms will be at greater risk of misinterpretation of their methodologies and their reasons for picking certain assets, no matter how sincerely intended.
For example, an asset manager may promote an ESG fund labelled as “sustainable” or “low carbon” even if that product contains assets that may be considered contrary to ESG considerations from certain viewpoints. For instance, an oil and gas stock may find its way into a “low carbon” labelled fund because the stock has a lower carbon footprint compared to peers and is rapidly transitioning to renewables. Instances such as these leave firms at risk of accusations of mislabelling.
Elisabeth Seep, Head of ESG Product Management at RIMES, comments: “Accusations of greenwashing are a significant risk to the reputation of firms. Such accusations often stem from challenges asset managers face in integrating ESG across all asset classes, given the current gaps in data. Another challenge is that ESG data is often only provided at the level of the issuer, and it can be difficult for firms to map that data across the security master.
“Firms looking to move into the ESG space therefore need to source data from as many providers as possible to ensure broad coverage – the gaps of one provider can then be mitigated by the strengths of another. However, the more data vendors that asset managers work with, the more difficult it becomes to manage the growing ESG data universe.
“Here, it adds real value to work with a data management specialist like RIMES that can source and validate ESG data from multiple vendors and map ESG data from the issuer level across commonly used market data hierarchies. This approach empowers the asset manager with improved coverage, faster time-to-market, and high-quality data delivered for multiple use cases across the asset manager. That means they can mitigate risk while servicing all their required asset classes and use cases.
“As the ESG market matures reputational risk will increase, and my view is that firms will also look for an independent third-party provider to audit their ESG products and integrations. Third-party analysis will help firms confirm that their fund genuinely reflects its marketing claims and that all asset classes can be managed within the ESG remit. Such independent verification will help bring greater credibility to the space and boost the confidence of regulators and investors that firms are approaching ESG with sincerity and purpose.”
As the ESG market continues to grow, regulatory oversight is likely to increase. The next blog in this series will focus on the regulatory headwind that asset managers will face and what steps they can take now to prepare.
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