A name normally gives the first impression of what something is about. Investment products with "ESG" (environment, social and governance), "green" or "sustainability" in their names have been on the rise in recent years. It is not uncommon for us to expect these products to be in line with ESG, green and sustainable principles. However, is that true?
Greenwashing is a term that is often associated with green or sustainable investing. This includes inaccurate and misleading marketing ploy using the labels of ESG, green and sustainability to attract investors who share the same values. In recent years, some large ESG funds have been accused of investing in fossil fuel producers, raising concerns about greenwashing.
Investors may feel like they are being fooled and lose confidence in ESG products if the ESG (or green or sustainable) label is a false claim. To tackle the problem of greenwashing, regulators around the globe have tightened the disclosure requirements of ESG investment products in recent years so that investors have access more relevant information to make informed decisions.
In terms of ESG investment product disclosure, SFC-authorised ESG funds are required to describe their ESG focus, measurement criteria and investment strategies in the offering documents. They are also required to conduct periodic assessments of how they attain their ESG focus and disclose this assessment at least annually so that investors can assess whether the fund’s ESG performance has met their expectation. A non-ESG fund is not expected to name or market itself as an ESG fund to avoid any suspicion of greenwashing.
Smart consumers will not only make decisions based on product names but will also read product description when shopping. The same applies to the selection of ESG funds. Instead of solely relying on the name or marketing materials of a fund, investors should read the offering documents carefully to understand its ESG strategy. The dedicated ESG fund webpage on the SFC website contains the offering documents of authorised ESG funds, allowing investors to learn more about how the funds incorporate ESG factors to achieve their focuses, and decide whether the funds meet their investment needs.
However, in reviewing the disclosures of ESG funds, we must bear in mind that currently there are no internationally recognised definitions of green or sustainable investment. What does green or sustainable mean? It is quite subjective indeed. For example, there are various discussions and debates about whether nuclear energy is a type of green energy or not. Besides, there are diverse types of ESG investment strategies, some of which may be unfamiliar to investors or difficult to understand, such as impact investing or ESG integration. Investors are encouraged to carefully consider whether a ESG fund meets their investment needs and preference.
