The need for collaboration to avoid greenwashing

Fund managers should work collaboratively with data providers to minimise greenwashing risks in their products, according to a panel. 

On a panel at the Responsible Investment Association Australasia (RIAA) annual conference in Sydney, they discussed how fund managers can work with index providers and RIAA when it comes to the development of sustainable products. 

When running a sustainable or responsible fund, ASIC expects fund managers to consider matters such as whether the product is true to label, whether they have used vague terminology, whether headline claims are potentially misleading, and whether they have explained the investment screening criteria.

Maya Beyhan, senior director and ESG specialist for index investment strategy at S&P Dow Jones Indices, said: “It is important to focus on education, collaboration between asset manager and index provider, and the quality of the underlying sustainable data.

“Education is absolutely fundamental. It is our responsibility to articulate clearly the index methodology. There shouldn’t be room for misunderstanding or misinterpretation. We should articulate it very clearly and be understood very well.

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“Moving onto collaboration between asset managers should be working together with index providers. It should be a tight-knit relationship with an open channel of communication. At S&P, we organise educational sessions where we tackle their questions, explain the index methodology, and provide them with research insights. 

“Finally, quality of sustainability data, I can’t emphasise enough how important this is. An index is rules-based and systematic, but if the underlying company level is not robust or accurate, then it will not be accurate when you bring it to a portfolio level.”

She acknowledged it can be difficult for fund managers to obtain a reliable score as the scores can vary widely between different ratings providers. 

For example, the S&P Global ESG Scores measure a company’s performance and management of material ESG risks, opportunities and impacts. On the other hand, LSEG scores objectively measure a company’s relative ESG performance, commitment and effectiveness across 10 main themes.

She said: “ESG scores may be perceived as subjective. There is low correlation between different data providers. From one provider, you can score highly on ESG, but with another it might score low, which creates confusion. This is an ongoing challenge.”

Reflecting from a fund manager perspective, Caroline Ramscar, ESG investment specialist at T. Rowe Price, said its Global Impact Equity Fund is certified by RIAA itself and that this was a challenging process to achieve but served as a good benchmark to clients that it had met its stated objectives.

The actively managed fund focuses on three impact pillars: climate and resources, social equity and quality of life, and sustainable innovation and productivity, guided by the United Nations Sustainable Development Goals (UN SDGs).

“We have been clear about what is responsible investment and how we communicate that with external clients. We only put one fund through the RIAA certification process as this fund lends itself neatly to the key tenets of avoiding greenwashing and uses globally recognised frameworks.

“It’s important to disclose the methodology and the rationale on why something has been included in a portfolio and to have repeatable process that you can apply across asset classes.

“RIAA certification has been a game changer in the Australian market as there are many adviser meetings that we wouldn’t have had without it. It shows we are taking it seriously, we are credible and [the certification] is a high hurdle to reach. It takes time and is a huge commitment with a high percentage of funds not making the bar first time around, so it resonates with people who are looking for that extra validation.”