Fund Disclosure and Greenwashing Risk Report
The CFA Institute Research and Policy Center releases the fund disclosure and greenwashing risk report, which aims to provide an analysis of greenwashing risks from an investor perspective.
The report analyzes 60 public funds from the EU and North America that are marketed to individual investors and incorporate ESG factors into investment decisions. The report found that greenwashing risk increases when funds disclose information that fails to enable investors to understand their sustainable characteristics.
Greenwashing Risk of Fund Disclosures
Greenwashing has become a hot topic in the ESG field. It will damage trust in the investment industry and have a negative impact on the sustainable development progress of investees. From an investor’s perspective, greenwashing may cause assets to be misallocated in products that are inconsistent with investment objectives. Solving the greenwashing problem can protect investors’ interests.
Related Post: What is Greenwashing? How to Avoid Greenwashing?
When it comes to fund disclosure, greenwashing may take the following forms:
- Missing information: Fund ignores some material ESG information.
- Unsubstantiated claims: Fund disclosures are not substantiated and verified.
- Inconsistent contents: There are contradictory issues in fund disclosures;
- Exaggerated ESG performance: The ESG results disclosed are inconsistent with reality.
Research on Fund Disclosure and Greenwashing Risk
The report selected a total of 60 public funds as samples, covering a variety of asset classes, asset sizes and ESG strategies. In terms of asset classes, 77% of the sample are equity funds, 20% are fixed income funds, and 3% are multi-asset funds. In terms of asset size, 80% of funds are within US$1.5 billion.
After determining the sample, the report evaluated each fund’s public documents, including fund prospectuses, semi-annual reports, annual reports, additional information statements and key investor information documents. At the same time, the report also analyzes the fund’s record in terms of engagement and proxy voting. For funds from Europe, the report also considers their information disclosures under the Sustainable Finance Disclosure Regulation (SFDR).
The report found that 5 samples were at the risk of greenwashing, and 3 of them were from North America and 2 from Europe. The proportion of controversial samples in Europe is lower, which is related to the implementation of SFDR. SFDR provides guidance for funds and reduces the risk of greenwashing at the disclosure level.
In terms of common forms of greenwashing, 3 samples had problems with inconsistent disclosure content, 1 had problems with omitting information and publishing unsubstantiated claims, and 1 had problems with exaggerating ESG performance. For example, a fund lists an investment exclusion list on its website, but states in its prospectus that its investment scope may be broader than what is allowed in the list.
Recommendations on Fund Disclosure
CFA Institute believes that although the proportion of funds with disclosure problems is not high, investors, asset management companies and regulatory agencies need to take certain measures to reduce the risk of greenwashing.
In addition to analyzing the fund’s marketing materials, investors also need to carefully read the fund’s issuance documents and sustainability reports to understand how it incorporates ESG factors and applies them to analysis and decision-making. Investors also need to understand how funds measure, monitor and report sustainable impact.
Asset managers need to clearly and fully disclose a fund’s sustainability proposition and use appropriate ESG terminology. The calculation formula needs to be disclosed in with sustainability indicators to reduce information asymmetry.
Regulators need to clarify the definition and characteristics of sustainable funds and collaborate across multiple jurisdictions to establish consistent ESG terminology and taxonomies. They also need to set regulations like SFDR to promote consistency.