Fund Solutions

Action Against Greenwashing from Asset Managers Vital

Cerulli white paper spotlights significant asset owner concerns over managers’ “overstating” or being “unclear” on sustainability commitments. 

Asset owner responses to a survey by global research and consulting firm Cerulli Associates highlighted concerns about the level of information they are receiving from asset managers on ESG funds that claim to be sustainable. 

The white paper surveyed 210 institutional investors comprised of pension funds (57%), insurers (31%), and endowments and foundations (12%), with AuMs ranging from €500 million (US$539.3 million) to over €6 billion – 57% of which possessed AuM between €1 billion and €5 billion. 

The report said greenwashing as a key concern for asset owners, with asset managers “overstating or providing unclear messaging” on their level of commitment to sustainability. Fifty-eight percent of European asset owners flagged the issue as a key concern. 

Further, 46% of asset owners surveyed noted that an ESG product’s investment policy allows for a significant proportion of non-sustainable investments, with 20% of respondents pointing to misleading claims about product’s ESG-related results.

European asset owners said their main challenge in assessing greenwashing was a lack of transparency (58%), with 43% highlighting the insufficient levels of reporting by asset managers. 

David Fletcher, Associate Director at Cerulli, told ESG Investor that for asset managers “building trust and demonstrating the value of ESG investments will require time and a robust track record for some of the investments”. 

“As time goes on, it will be easier for asset managers to convey to investors what the value truly is, as they’ll be able to point to a decade or more worth of investment data,” he said.  

“Asset managers need to effectively convey their commitments, investment processes, and the reasons behind them to instil confidence in investors. 

Increased scrutiny 

Cerulli’s research shows that asset managers continue to devote additional resources to ESG product development amid increased scrutiny from regulators and investors. 

Regulators in France and Sweden have investigated allegations of greenwashing, and Cerulli’s report noted that regulators had found multiple examples of asset managers’ ESG claims being “inconsistent” with their underlying investment strategy.  

Fletcher flagged that the EU’s Sustainable Finance Disclosure Regulation (SFDR) – and the efforts of the European Securities and Markets Authority (ESMA) to provide certainty on its requirements – are “more clearly laying out what is sustainable and what sustainability means”. In 2022, ESMA announced that it will begin working on a legal definition of greenwashing to determine how it differs from other types of mis-selling of financial products.  

ESMA faced scrutiny earlier this year over its plans to introduce labelling rules for funds using ESG, sustainable or impact in their name, which could impact an estimated 14% of the EU’s investment fund universe of 29,000 funds and create conflict or overlap with SFDR requirements. 

Cerulli’s analysis of Morningstar data suggests that at least 400 Article 9 funds are at risk of being forced to downgrade because they are not allocating assets solely to sustainable investments as required or do not provide data to demonstrate that they are doing so.  

“This shows that there is a standard in place and that standard is being honed,” said Fletcher. Fourteen percent of European asset managers polled by Cerulli said they plan to downgrade Article 9 funds to Article 8 over the next 12 months. 

“Our findings indicate that, despite acknowledging the presence of additional hurdles, particularly in Europe with regulations like SFDR and the need to downgrade certain funds, there is still quite a bit of appetite for expanding ESG products,” said Fletcher. 

“In Europe especially, there is a lot of concern about bias and underperformance in the short term, but asset managers still have ESG products on the front burner.” 

Ongoing ESG product development 

Cerulli observed that asset managers are continuing to develop products, sales, and marketing of ESG products. In Europe, 49% of asset managers said they consider ESG marketing to be a ‘very important’ feature of their overall marketing efforts, and 58% of managers in the U.S. consider ESG a top product development initiative. 

In France, Italy, and the Netherlands, asset managers were the most concerned about greenwashing allegations, with 67% expressing that they were ‘highly concerned’. Asset managers were less worried about greenwashing allegations in other regions, with 62% in the UK and 67% in Switzerland stating they were ‘not concerned’. 

ISS Market Intelligence’s ‘State of the ESG Fund Market’ report found that fund providers in the US have continued to launch new ESG products at a “relatively healthy pace”, despite turbulent markets, increases in energy prices, and political backlash impacting demand for ESG products last year. The report said this indicates asset managers expect demand for ESG-themed investments to remain strong. 

Fletcher said that although some individual ESG strategies performed negatively over the past 12 months, he underlined that Cerulli’s research reflects an industry largely “unswayed by negative rhetoric surrounding ESG investment”. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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