Wealth managers need to tackle greenwashing now
ESG is on the rise within the HNW space, with 26% of HNW assets allocated to ESG investments. However, greenwashing remains a significant challenge, presenting a growing threat to the reputation of wealth managers. This means that a transparent proposal is essential in a context of strong HNW demand and increasing supply.
Although there is a clear demand for ESG investments, greenwashing remains a problem in wealth management, as the criteria for selecting and including companies lack standardization in most countries. For example, some sustainable funds exclude Afterpay on the grounds that the company supports consumerism among younger generations, while others include Afterpay because it offers an alternative to credit cards.
The number of different frameworks and performance monitoring also remains a major challenge. According to GlobalData 2021 ESG Strategy Survey, 53% of financial services firms say measuring and tracking ESG-related performance is the biggest challenge in ESG reporting. 36% cited the existence of too many reporting frameworks.
Specific to investment products and financial market participants, the CFA Institute’s Global ESG Disclosure Standards for Investment Products provide the most common and widely applied guidance, while the European ESG Disclosure Regulation Sustainable Finance (SFDR) imposes sustainability disclosure requirements on asset managers and other financial market participants. However, the CFA standard is voluntary while the SFDR only applies to financial services companies in the European Union.
As sustainable and ESG funds flood the market, investors are increasingly concerned about greenwashing. Research by Quilter found that ESG investing “not being what it claims to be” is the top concern identified by 44% of investors. In particular, wealthy investors expect a clear and transparent ESG proposal. GlobalData’s findings show that affluent investors have high expectations when it comes to their ESG investments. Globally, 73% of wealth managers agree that affluent investors expect ESG products that apply positive rather than negative screening strategies (i.e. including companies with a positive impact, as opposed to excluding those that cause harm).
This means that wealth managers and distributors who deal with investors need to be prepared to answer a range of client questions and concerns. Indeed, there is a clear business rationale for investing in a transparent ESG strategy. At GlobalData 2021 ESG Strategy Survey61% of financial service providers said their efforts had a positive impact on client satisfaction, while only 1% said their ESG strategy had not delivered any benefits.
Additionally, non-compliance has significant reputational and financial implications. Governments around the world are scrambling to introduce ESG standards, and thorough due diligence is becoming increasingly important as regulators crack down on greenwashing. For example, in May 2022, the United States Securities and Exchange Commission accused BNY Mellon Investment Adviser of inaccuracies and omissions regarding ESG considerations when making investment decisions for certain mutual funds that she was managing. To settle the charges, BNY Mellon agreed to pay a $1.5 million fine. The case was the first time the regulator had come to terms with a wealth manager on ESG issues.
In the same month, Deutsche Bank was raided by German law enforcement officials on suspicion of fraudulent advertising of sustainable investment funds, while reports that the SEC had invested Goldman Sachs in sustainable investment funds ESG investing were published in June 2022.
The examples above are probably just the tip of the iceberg, as regulators are upping their game. Previously, governments and regulators were relatively silent due to the lack of enforceable standards. However, this situation is changing. The above incidents should serve as a wake-up call for wealth managers to revise their rhetoric and implement stricter ESG due diligence procedures to avoid a greenwashing nightmare.