David Osfield, global fund manager at EdenTree Investment Management comments on the pitfalls of greenwashing.
A recent report by ethical IFA Castlefield has criticised many managers for giving ‘ethical and sustainable investing a bad name’.
The report raises concerns on the packaging of responsible investing, at a time when the industry faces a growing ‘greenwashing’ risk – a term when managers purport to be ‘green’ in marketing, rather than integrating
ESG/sustainability into processes.
As the report rightly states, using ‘ethical’ or ‘sustainable’ in a fund name does not necessarily make it so. Unfortunately, the loose tag of ‘SRI’, ‘ESG’ and ‘ethical’ has created caveat emptor.
Such a laissez-faire stance is in stark contrast to the scrutiny the IA levied on
income funds failing to meet a yield requirement. Assessing the degree of ESG integration could be enhanced by the adoption of a standardised framework.
Passive providers were also criticised for including companies
under major ethical scrutiny.
While passive houses will attempt to reassure investors, employing strategies designed to achieve the performance objective of an index, with limited screening, is in our view the antithesis of true responsible investing.
The use of third-party screening can be an important input, given non-standardised ESG metrics. However, the real power lies in a proprietary
framework. Key to delivering alpha is the identification of sustainable companies mitigating the financial implications of ESG risk, while creating products and services addressing the world’s sustainable challenges.
Appropriate due diligence and engaging with companies on ESG issues must be integral to the investment process. Responsible investing is not merely exclusion; it is recognising the shape of change and being a positive agent in the process.
Achieving strong performance through responsible investment requires a shift beyond being a passive signatory to the UNPRI and a greenwashing of products
– which puts the future of ethical investing in peril. UNPRI has indicated it will take a firmer line with signatories failing with compliance and it is time the
asset management industry also appraised its commitment to true