Greenwashing beneath the watchful eye of regulators

However, as ESG investing becomes mainstream, it is increasingly becoming the subject of hype aimed at driving revenue rather than meeting investor needs.

This danger has not escaped the attention of regulators. In recent weeks, members of the Canadian Securities Administrators (CSA) – including the Ontario Securities Commission and the British Columbia Securities Commission – have been reviewing fund managers’ ESG activities to ensure their marketing claims match those in their wallets.

“The CSA is currently scanning registrants’ marketing practices to monitor their compliance with securities laws,” summarizes Ilana Kelemen, Senior Advisor, Communications and Stakeholder Relations, CSA. We have further focused the scope of our review of mutual fund managers [pour nous concentrer] on marketing materials for ESG products and services.”

The results of the CSA audit are expected by the end of the third quarter, says Ilana Kelemen.

Similar concerns about the ESG activities of portfolio managers and investment advisors have recently led to compliance work by the US Securities and Exchange Commission (SEC). This regulator has uncovered a variety of issues, including “potentially misleading” communications by companies to investors regarding ESG investment processes and their compliance with global ESG practices.

The SEC also found that companies had inadequate or inconsistent approaches to implementing positive and negative portfolio screenings, that proxy voting deviated from stated practices, that companies made unsubstantiated performance claims or were misleading, or that their internal controls and compliance programs were inadequate , to meet the global ESG standards they claim to follow.

The SEC also found that some funds’ portfolios were heavily populated with companies that received poor ESG ratings despite promising investors the opposite.

Time will tell if the CSA uncovers similar issues in its compliance reviews, but regulators around the world are paying closer attention to protecting investors in the growing sustainable investing market.

Last year, following a review of the sustainable finance industry, the International Organization of Securities Commissions (IOSCO) created a task force to address emerging concerns from regulators about protecting investors on ESG. This includes insufficient information from issuers and asset management companies as well as so-called “greenwashing”, i.e. exaggerated or inaccurate statements about the ESG references of investment strategies.

Ensuring that companies provide investors with accurate information is a traditional regulatory priority. However, in the area of ​​sustainable investing, the challenge of ensuring truthful advertising is compounded by the lack of clear and universal standards.

So far, the development of more useful ESG disclosures has focused on issuers – encouraging companies to be open with investors and provide details about the risks they face and the opportunities they face. However, regulators are increasingly interested in the statements that asset management firms and advisors make to investors about their ESG activities.

The IOSCO task force is expected to publish a report on issuer communications by the end of June and plans to publish reports on communications from asset management firms (including greenwashing), ESG ratings and data providers by the end of 2021.

In the meantime, some regulators are publishing reporting requirements specifically geared towards sustainability. Regulations in the European Union (EU), which came into force on March 10, require portfolio managers to classify their funds into one of three categories based on sustainability content.

According to research by Morningstar, early EU classification efforts found that around 25% of the total European fund market has a sustainability component under the new standards. Morningstar said its researchers expect 25% to rise “as managers improve strategies, reclassify funds and launch new ones. [pour répondre aux nouvelles normes de classification]”.

Moving forward, emerging interest in greenwashing and other ESG-related investor protection concerns could impact asset traders. But so far, retail investor greenwashing hasn’t been a major concern for the Mutual Fund Dealers Association of Canada, says Karen McGuinness, senior vice president, member regulation, compliance.

“We don’t really have any problems [avec les conseillers qui répondent aux critères ESG des clients individuels] in the mass-market retail sector, she explains. We see situations where clients have asked not to invest in a specific sector or ESG funds, but this is rare.”

The Investment Industry Regulatory Organization of Canada (IIROC) considers clients’ ESG preferences as a potential eligibility factor, along with risk tolerance and other key information.

“As the Canadian investment landscape changes, ESG can be a relevant part of the advice,” IIROC said. These are important conversations that consultants should have [être]and have with their customers.”

Despite growing investor protection concerns from regulators regarding sustainable investing, supply and demand in this space continues to grow – particularly in the wake of the COVID-19 pandemic.

According to the research firm, global sustainable finance activity hit record levels in 2020 in both equity and debt issuance. That momentum has accelerated this year, hitting record highs in the first quarter as countries prioritize investments in sustainable infrastructure as a key catalyst for an economic recovery from the pandemic.

At the same time, the search for higher yields and growing awareness of ESG risks should help increase investor demand for sustainable investing. With ESG investing no longer a niche interest, the mainstream investment industry can expect regulatory scrutiny to continue to intensify.

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