Asset managers face growing scrutiny over sustainability claims

Asset managers have not always crowned themselves in glory when it comes to sustainable investing.

At best, they have been accused by environmental campaigners of an indifference towards using their influence as investors to save the planet. And, at worst, they have been called out for falsely marketing their funds as ‘green’ to tap into the burgeoning demand for sustainable investing when, in truth, many of those products were stuffed full of companies that pollute. 

This became such a problem that financial regulators around the world had to step in to protect consumers from being misled. In 2023, for example, DWS, the investment arm of Deutsche Bank, was forced to pay $25mn to the US Securities and Exchange Commission in relation to “misstatements” over its environmental, social, and governance (ESG) investment processes.

A year earlier, Goldman Sachs Asset Management agreed to pay $4mn to the SEC to settle allegations of ESG violations. 

At the same time, investment managers have been quietly dropping the word “sustainable” from the names of their funds, in response to increasing regulatory concerns about mis-selling.

In August, the European Securities and Markets Authority updated its guidelines on ESG fund naming rules, setting a November 21 deadline for compliance. Under the new rules, funds with the term ESG or sustainable in their name must ensure they have at least 80 per cent of investments tied to environmental characteristics. Equivalent rules are set to arrive in the UK in December.

Seventy-nine funds in Europe removed the word “sustainable” last year, with another 26 doing so during the first eight months of 2024, according to data from consultancy Broadridge. Many asset managers said they did so due to a lack of regulatory clarity.

By contrast, in 2022, before the increased regulatory scrutiny and as the popularity of green products was growing, 99 funds added the word.

“Some asset managers still stretch the truth to try to gain the trust and business of responsible investors,” says Abhijay Sood, senior research manager at campaign group ShareAction, which has been highly critical of the industry’s approach to green investing. 

ShareAction published a report in June last year that found asset managers had inadequate targets to reduce emissions, were continuing to invest in companies expanding their oil and gas production, and were stalling the move to green, clean energy by not investing enough in new low-carbon energy opportunities.

Until 2022, there seemed to be a lot more momentum among asset managers to address climate change

The NGO, whose report was based on a survey of 77 of the world’s largest asset managers, says it is “alarming” to see so many failing to adapt their investments to tackle climate change. It adds that the sector needs to use the “huge power” it wields through its investments to bring about a “meaningful transition”.

Sood says: “Overall, asset managers’ climate scenario analysis is unrealistic — failing to account for weakening carbon sinks, tipping points or political instability. They often project that a world that is 3C hotter will not meaningfully harm their portfolios.”

The research manager adds that, for an industry that “professes to reward individual boldness”, asset managers are remarkably risk averse. “They do not want to stand out as doing something unusual and most don’t want to be seen as either climate laggards or leaders,” he says.

In fairness to asset managers, many have added their names to an industry pledge, the Kunming-Montreal Global Biodiversity Framework, to make a “positive contribution” to biodiversity through activities and investments.

Dubbed a “Paris Agreement for nature” — a hat tip to the 2015 global climate accord — the framework aims to, among other things, protect a third of the planet’s lands and seas by 2030. It replaced the Aichi Biodiversity Targets set in 2010, under which just 17 and 10 per cent of terrestrial and marine areas, respectively, were under protection.

It is not legally binding, however, so critics have consequently been asking whether it just creates another way for investment companies to “greenwash” their businesses and claim they are working hard when on biodiversity without, in fact, doing much at all.

“Until 2022, there seemed to be a lot more momentum among asset managers to address climate change,” says Sood. “However, our analysis shows that most of this was signing commitments, demanding more disclosure, and running projections of the future.”

“This low-hanging fruit started to run out at the same time interest rate hikes made sacrificing short-term gain much harder for asset managers to justify, derailing progress.”

In response to those allegations, the Investment Association, a trade group for asset managers in the UK, says the characterisation of an industry that is all “talk and no action” is not matched by the reality of the economic transformation that is taking place.

Paul Scaping, public policy specialist at the Investment Association, says: “In the UK, coal has been phased out and renewable electricity generation ramped up to take its place.

“The companies and projects that enable this transition through the supply chains, construction and management of infrastructure are frequently supported by the allocation of capital by investment managers on behalf of their clients.”