Investors may wish to claim against their fund manager when they detect greenwashing, but there is little hope of such claims succeeding, says Stefano Capacci.
The business unit lead for sustainable finance at Longevity Partners says the line of accountability in environmental, social and governance investing is murky, if anything investors are responsible for their own decisions.
However, this may change if the market starts to develop products that write in legally binding decarbonisation commitments.
In this Q&A with FTAdviser In Focus, Capacci explains the current issues with ESG regulation, the things that irk the regulators and why complaining is difficult.
FTA: Researchers are warning of greenwashing as passive ESG options have exploded. Do you predict a wave of claims in future from investors who feel they have been misled?
SC: Financial markets have evolved in a way where asset managers are asked to police the ESG performance of the products they invest in, meaning that the nature of claims from investors looking for recourse is complicated.
Financial actors are typically risk averse. Couple this with the fact that issuers of ESG products do not provide any guarantees in their fund prospectuses, and the investor is left wholly responsible for their own interpretation of the product.
In the case of Article 9 funds, there is a self-reporting mechanism where fund managers interpret the EMEA regulation.
Similarly to corporate investors, consumers purchasing such funds then have the responsibility of reviewing the ESG claims made by the product and, like in traditional risk management, take on the risk of the fund potentially failing to meet their ESG commitment.
However, if a fund manager markets an Article 9 product and subsequently does not deliver on the fund’s sustainable objectives, two risks present: (1) when audited, the regulator could fine them or force them to downgrade; and (2) the investors in the fund could withdraw their money.
FTA: How effective are ESG products in delivering what they promise?
SC: The current problem for the market is that the financial system has great limitations in being effective to meet these new requirements.
By definition, investors are capital allocators solely focused on risk and return. Because of our need to decarbonise the economy, we have created incentives in the market to allocate capital to green investments.
However, without a strong regulatory backing informed by clear cut definitions and targets around what the different shades of ‘green’ are, we are going to come up against hurdles.
Beyond the obvious bad faith actors, most greenwashing comes from a space of ignorance, adapting frameworks and targets that are not up to scrutiny when compared with the real changes we need to make to decarbonise the economy.
