Responsible investing is transitioning into a more regulated arena. Such transitionary phases offer opportunities to reshape expectations and practices but also challenges for market participants to stay competitive and compliant. In this blog, we outline six best practices to mitigate and avoid greenwashing in investment stewardship.
Greenwashing can take many shapes and forms, and be intentionally misleading or unintentional. It’s fair to say however that only a few actively strive to break the law, while the rest try to act within it.
Risks of greenwashing exist when there is misalignment between what’s being communicated and the reality of actions. Investors need therefore to continuously assess how they articulate, disclose and market their practices. From processes and governance structures to portfolio alignment and impact, it has become mission-critical for investors to back up their responsible investing claims.
Cracking down on greenwashing
As we've seen across regions lately, regulators have moved into an enforcement stage in preventing greenwashing. Most recently, the SEC cracked down on DWS, finding that it made materially misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG-integrated products. Similarly, in a previous instance, the SEC fined BNY Mellon for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed.
On the industry level, a recent study by The 2° Investing Initiative (2DII) assessed environmental marketing claims related to hundreds of the largest environmentally focussed Art 8 and Art 9 funds. It found, for many funds claiming to “achieve positive effects” or to “reduce negative impacts” through stewardship, that the public disclosures on engagement and voting were insufficient to substantiate such claims. Furthermore, an academic research paper explores how greenwashing and subject matter expertise-related competence greenwashing has been increasing alongside the growth in sustainable finance.
Lastly, ESMA, in response to the European Commission's request for input on greenwashing risks and the supervision of sustainable finance policies, reports concerns that issuers and asset managers make engagement claims with little substantiation. The most frequent forms of misleading claims included references to unsubstantiated (empty) engagement strategies that are neither consistent nor transparent, and do not provide important details about the progress of engagement.
Table 3 from ESMA's report, summarising the most relevant areas of greenwashing:
Best practices to mitigate and avoid greenwashing in your active ownership:
What does stewardship refer to? And what does engagement really mean? There is no shortage of sources defining each, which in itself is problematic because the lack of standardisation is impacting on investor practices. Even if we will inherently have some degree of misalignment between regional expectations, there are still some universal truths that investors would do well to follow.
1. Align strategy with resources:
Investors have different resources. Ensure your objectives and ambition level align with your profile and sphere of influence. By focusing on quality over quantity and capacity building, you can be honest about your approach and what you’re working towards.
When deciding on appropriate stewardship resources, make sure to cover:
Budget allocation (staff, training, tools)
Team (size, expertise, experience)
Knowledge and data-sharing structures (coordination, system capabilities)
2. Adopt robust governance arrangements:
Appropriate oversight and accountability are essential for a well-run stewardship program. While governance arrangements will vary depending on type and size of organisation, the chosen approach should provide consistency and be integrated with investment decision-making.
Common approaches to formalising stewardship governance normally include;
establishing an oversight committee,
appointing dedicated senior leadership,
creating stewardship or ESG teams, and
improving the coordination between teams.
Team structure and responsibilities often depend on the size of the organisation, with smaller asset managers typically having the investment teams in charge, while larger organisations often split the mandate with ESG/stewardship teams.
3. Get the process right:
Optimising your engagement process requires spending time and resources on both workflow and system capabilities. Ensure you build a strong process around the creation, execution, and evaluation of your stewardship program. Reinforce it through strong governance, ongoing training and the adoption of appropriate tools to streamline processes.
Follow this guide for insights on how to operationalize the process around engagement recording, monitoring and reporting.
4. Bring engagement and voting together:
Proxy voting and engagement go hand in hand, they are both part of the broader investor stewardship toolbox to assert rights and influence over investees.
To avoid risks of greenwashing and being called out for not having your house in order, it’s important to demonstrate intentionality and a coherent strategy. Operationally creating and evidencing the link between engagement efforts and subsequent voting decisions requires a structured approach to coordination and data sharing - Stewardship platforms like Esgaia’s can empower your strategy here.
5. Future-proof your data management:
Stewardship-related data and operational silos can create barriers to engagement success. Here’s where a dedicated system can help you structure and organise the data, improve coordination and simplify reporting.
Excel works until it doesn’t, you can probably sense if it’s sufficient or if the headaches are getting worse. Take time to evaluate your data management needs, coving for example engagement tracking (recording and monitoring), analytics, voting data integration, and tools for reporting. Ultimately, the ambition should be a more integrated and seamless workflow that empowers your asset stewardship.
6. Be honest in communications:
Reporting and compliance represent significant undertakings for investors that costs both money and resources. Follow these four steps to further develop your reporting strategy:
First order of business should be data quality. You should be able to trust your data, and it shouldn’t require a lot of ex post information gathering to fill in gaps. If you struggle with this, contact us.
Secondly, can you substantiate your claims? Given how difficult it is to prove additionality in engagement, be clear about your role and the purpose of efforts. Preferably separate tracking of change-oriented dialogues vs standard monitoring, and use case studies to exemplify value creation.
Thirdly, as concerns about greenwashing continues in the market, consider what assurance will be appropriate in the future to reassure your clients and governing bodies.
Fourthly, ensure you have a good understanding of reporting expectations and where the trend is going. Remember, more is not always better, but less is not always more, so strive for a balance and employ plain language practices for increased understanding.
Finally, telling your stewardship story is not just about the actual numbers, it’s about the whole strategy. From policy and objectives, governance and resourcing, to actions and outcomes, be realistic about your practices and what you hope to achieve.
//The Esgaia team
If you need help with your data management, please contact us!