Listen to this article (3:08):
According to Hannah Zhang at Institutional Investor, European regulators have, in recent years, been clamping down on funds that claim to be environmentally, socially, and governance (ESG) friendly. And it seems like investors are paying attention1. According to the latest ESG report from Cerulli, 56% of European allocators said they were concerned about greenwashing in the asset management industry. The issue is particularly worrying in countries such as the Netherlands, France, Switzerland, and Nordic countries where over one-third of allocators were extremely concerned about unsubstantiated ESG claims.
Cerulli surveyed 210 European allocators, including pension funds, endowments, foundations, and insurers throughout 2022, and found that enthusiasm towards ESG funds in Europe has been declining over the last year. European investment funds that were marketed as ESG integration and engagement products saw a net outflow of €181 billion ($195 billion) in the first three quarters of 2022. This is a complete reversal from the €150 billion net inflow recorded in the year before.
The decrease in investor sentiment towards ESG funds has come as regulatory scrutiny of greenwashing has increased across Europe. In the U.K., the Financial Conduct Authority has proposed measures to clamp down on marketing efforts or public relations campaigns that make funds look more environmentally friendly than they actually are. Local authorities in France, Sweden, and Switzerland have found inconsistencies between some asset managers' ESG claims and their underlying investment strategies.
As the legal framework around the ESG industry becomes more explicit, fund managers in Europe may have to pay higher prices for engaging in greenwashing activities. "Despite the prevalence of greenwashing allegations in the asset management industry, few managers have been fined," said Justina Deveikyte, director of European institutional research at Cerulli. "However, this may change as the regulation around sustainability claims becomes clearer." She noted that 85% of allocators in Europe support fining managers for greenwashing activities.
Facing pressures from regulators and allocators, fund managers themselves are also reflecting on how to better substantiate their ESG claims. Colin Graham, head of multi-asset strategies and co-head of sustainable multi-asset solutions at Robeco, said that one of the main challenges for managers is that companies may "end up selling or divesting businesses that don't meet ESG criteria" instead of improving their ESG practices. In his most recent outlook, greenwashing was listed as one of the ten possible "black swans" in 2023.
"We see the potential for sustainability claims to be more strongly scrutinized by regulators, media, and investors, and as a result, large financial institutions will struggle to evidence their sustainability credentials across facets of their businesses," Graham said.
In conclusion, says Zhang, European allocators are concerned about greenwashing in the asset management industry. As a result, enthusiasm towards ESG funds has been declining in Europe, with investors pulling out billions of euros from such funds. Regulatory scrutiny of greenwashing has increased across Europe, and as the legal framework around the ESG industry becomes more explicit, fund managers in Europe may have a higher price to pay for engaging in greenwashing activities. Facing pressures from regulators and allocators, fund managers themselves are reflecting on how to better substantiate their ESG claims.
1 Adapted from source: Zhang, Hannah. "Regulators Warned Against Greenwashing. Allocators Listened." Institutional Investor, 18 Jan. 2023, www.institutionalinvestor.com/article/b8x2801z6j99zk/Regulators-Warned-Against-Greenwashing-Allocators-Listened.
2 Photo by Paul Blenkhorn on Unsplash