Sushil Kuner, principal associate, financial services regulation at Gowling WLG, explains these are great opportunities for the financial services sector to accelerate the transition to a net-zero emissions economy.
She says: “Climate-related risks also have the potential to have a material impact on financial markets and the introduction of mandatory climate-related financial disclosures would help investors, lenders and insurance underwriters to appropriately assess and price climate-related risks, creating a more stable and resilient sector.
“Greenwashing therefore seriously jeopardises not only the transition to a net-zero carbon economy but also the resilience of the financial markets. In particular, greenwashing can seriously damage investor confidence and erode trust and can create an image that the state of play is better than it actually is, thereby potentially slowing down any innovation and investment necessary in the fight against climate change.”
Determining ‘true’ credentials
While the issue of greenwashing remains and creates concerns around how green a fund really is, some experts have argued that advisers are still able to determine a fund’s true credibility.
Hortense Bioy, director of sustainability research at Morningstar, says: “Greenwashing is generally seen as intentional, occurring when asset managers over-claim and over-sell what they are actually providing.”
She explains such practices are problematic and corrosive to long-term trust and credibility and also pose problems for the planet if money does not flow into activities that help solve environmental issues like climate change, or social issues.
However, Bioy says that it is possible to determine a fund's true green credentials if the fund reports sustainability metrics.
“Disclosure isn’t standard across the fund industry yet, but starting from next year, with SFDR’s level 2 of disclosure, it should become easier for advisers to assess and compare funds’ green credentials,” she says.
“There is a spectrum of green strategies, from light to dark green, with different risk-return profiles. These strategies will play different roles in an investor’s portfolios. Investors should bear in mind that darker green funds, such as clean energy funds, often result in narrow and concentrated portfolios, which makes them more suitable as satellite holdings than as core parts of a portfolio.”
Likewise, Kuner says there will be funds that are greener than others, meaning that the underlying investments are more sustainable and, for example, have better metrics on carbon emissions.
She explains that financial advisers should take care to ensure that any comparisons are meaningful, based on underlying assumptions and proxy data, which fund managers are permitted to use in their green calculations and methodologies.
“Even if a fund is less green than another, they still may well be suitable for responsible investing taking into account the investor's overall objectives and risk appetite, which will include performance and potential returns,” she adds.
