Direct investing, external managers come under greenwashing watch
Institutional investors are tightening internal systems to monitor greenwashing in direct investing teams and externally employed managers, as regulators in Australia and across the world increase their scrutiny of the practice.
“The greenwashing concerns that stakeholders and regulators have are – in our view – real. Asset owners do realise this and want to make sure that they can demonstrate the way in which they have done their analysis,” said Hans Op’t Veld,chair of the markets and members committee of the Sustainable Development Investment Asset Owner Platform (SDI AOP).
The platform is an investor-led initiative founded by four leading global investors, including Australian Super, whose investor members today represent AUM of $1.5 trillion.
Op’t Veld is also principal director for responsible investments at PGGM Investments, the investment manager for the €277 bilion ($292 billion) Dutch pension fund.
PGGM Investments
SDI AOP
To support members’ efforts to crack down on greenwashing, the platform employs a highly rigorous and cautious approach to testing claims made by companies related to their equity and fixed income securities, and around private assets, that comprise the investible universe that SDI AOP reviews, he added.
“This issue is extremely important for asset owners and prompted the platform to begin with. We want to be absolutely sure that we can back up any alignment, output or outcome claims with data points that can be traced back to their origin.
"We do not want to mix positive and negative contribution, nor do we want to resort to scoring mechanisms that mix in data with opinions or estimates.
"This perhaps makes the approach rather conservative, but it does instil discipline. As we all appreciate that our reputation is on the line, we want to be in control of the data we use,” he said.
KPMG Australia
Geri McMahon, climate change and sustainability partner at KPMG Australia said that, with the greater pressure investors that now face to improve internal procedures for the monitoring and prevention of greenwashing, they were undertaking significant work, both internally and with their external managers, to future-proof their approaches.
INCREASING REGULATORY SCRUTINY
“Evolving standards and increasing scrutiny have led to more stringent definitions of ‘responsible investment’. To ensure the claims they making are accurate, asset owners will have to develop robust frameworks and policies around greenwashing, risk and control reviews,” he said.
“ASIC also encourage voluntary disclosure that is in accordance with the TCFD framework - which should ensure asset owners are well placed to transition to any future standard,” he added.
Australian regulator ASIC has identified greenwashing as a key priority for the coming years.
This included its publication in June 2022 of Information Sheet 271, ‘How to avoid greenwashing when offering or promoting sustainability-related products’.
The document includes the requirement that asset owners or issuers do not engage in misleading or deceptive statements or conduct, and fulfil their disclosure obligations.
A spokesperson for New Zealand Superannuation Fund (NZ Super) said that testing ESG claims made for directly-held investments was an important part of the screening process that all investment opportunities are put through.
“[The screening] includes a thorough evaluation of a potential investee company’s ESG policies and practices,” they said.
They added that the fund regularly publishes comprehensive disclosures of equity holdings, external investment managers and mandates, and direct investments, in order to provide stakeholders with transparency over the fund’s performance against its sustainable investing objectives.
“We also regularly review our managers’ performance against a range of metrics, including our expectations regarding ESG practices,” they said.
When it comes to claims made by external managers, ESG criteria are an important element by which it measured ‘conviction’ – a term that covers the fund’s confidence in the manager's competence to execute an investment opportunity and the general quality and 'fit' of the organisation with NZ Super (its second area of evaluation for managers is operational due diligence: the manager's regulatory, operational, organisational and financial processes and procedures), noted the spokesperson.
“Where feasible, our preference is for SMAs (separately managed accounts) and the like over pooled vehicles,” they said.
REGIONAL VARIATION
James Leaton, head of research at SDI AOP said that, when it came to scrutiny and prevention of greenwashing “some regions are ahead in terms of their thinking and regulatory drivers”.
SDI AOP
But, he said that in general, especially among pension funds, there was a growing emphasis on this dimension for investors globally.
“There is a new urgency for asset owners, partly driven by regulators. Among various drivers is the need to be clear about how they define their [sustainable investing] objectives,” he said.
Mart Keuning, advisor for responsible investing at ABP, the Netherlands’ largest pension fund, with €500 billion in assets, challenged the usefulness of ESG policies that are not rooted in an evidence-based approach by the end investor.
Rather than rather than seeking to back up claims made about the impact of direct investments or those made by managers employed by the fund, “it should be the other way around: we shouldn’t work on backing up claims that we make, but should only claim those things we know to be real and know to be true,” he said.