Sustainable investing: Five steps to avoid greenwashing

Pendal

October 2022

AS DEMAND for sustainable investing grows, Australians are becoming more attuned to the threat of "greenwashing".

What is greenwashing?

Australian investments regulator ASIC defines it as "the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical".

The value of Australian assets managed using a "rigorous, leading approach to responsible investment" passed $1.5 trillion last year — 43% of the total market, the Responsible Investment Association Australasia reported earlier in the month of October.

RIAA last year certified 225 products in Australia and New Zealand, representing $74 billion of assets under management — up $18 billion in a single year. (Pendal is named by RIAA as one of 74 responsible investment leaders in Australia.)

But not all investment managers are as green as they may seem. So what steps can you take to avoid greenwashing?

"It can be a real challenge to spot whether a product you've invested in is truly green versus one that's just claiming to be green," says Pendal senior risk and compliance manager Diana Zhou.

In June, Australian Securities and Investments Commission published guidelines to help product issuers self-evaluate their sustainability-related products.

But investors can still find it problematic separating financial products that are sustainable from the ones that just say they are.

Elise McKay, an investment analyst with Pendal's Australian equities team, says there are broad global questions on what exactly represents best practice in ESG.

Right now European regulators are leading the way with explicit regulations on disclosures, reporting and metrics.

"My view is that ultimately Australia will head down a similar path towards greater regulation — but we are not there yet.

"From an investor perspective, people are selecting these funds because they have an ethical desire to invest aligned with their beliefs.

"Product issuers have an obligation to be 'true to label' and deliver them the solution they are after."

How can investors be sure that the products they are investing in are delivering what they promise?

McKay and Zhou offer these five steps for investors and advisers to avoid falling victim to greenwashing:

1. Dig deeper than the glossy marketing material

Investment opportunities often come with glossy brochures, but behind the marketing material is a product disclosure statement (PDS), usually available on the product issuer's website.

Zhou says "the PDS, by law, must disclose the extent to which ESG practices are taken into account in selecting, retaining or realising an investment.

"Investors should read the offer documents (PDS and Additional Information Booklet) in detail rather than relying only on marketing. These documents should provide details on a manager's ESG practices.

"A PDS needs to be submitted to ASIC and needs to comply with certain rules in the Corporations Act — so there is regulatory oversight."

2. Check up on a product issuer's governance

Companies with strong governance frameworks are more likely to be in compliance with rules and regulations, says Zhou.

"You're looking for a dedicated responsible investment page on the an issuer's website.

"There will usually be policies and statements about responsible investing, climate change, human rights, modern slavery and stewardship. "

"The proxy voting process is important for transparency. There should be a record of how the manager voted at the annual meetings of its portfolio companies. Investors should be able to see which resolutions were voted on and which way the investor voted.

"Investors can also look at whether the manager is a signatory to the Principles for Responsible Investment (PRI) which gives an indication of the level of commitment a manager has on implementing its responsible investing strategies"

3. Understand how sustainability is integrated into the investment framework

There are a number of ways a manager can integrate ESG factors into the investment process - but some are more effective than others, says McKay.

Some managers may simply screen out investments while others conduct detailed benchmarking of a portfolio company's ESG targets.

"Look for detailed benchmarking on areas like climate change, diversity, biodiversity and natural resources, the circular economy and so on to identify who are really leading sustainability and ESG targets."

4. Look for evidence of stewardship activity.

A fund manager that genuinely cares about making a difference will be actively engaged with portfolio companies.

This goes beyond proxy voting, says McKay.

"Spend time understanding what stewardship activities are done — what are the areas that a manager is working on with companies."

You can read more here about what to expect from a modern investment manager's engagement activities.

5. Spend time with the investment team

Finally, and potentially most importantly, McKay urges investors to get to know their fund managers and get into a direct discussion with them to go behind the written word.

"Go and talk to the fund manager — get them to explain the framework to you," says McKay.

"Go beyond disclosure and get into a discussion to find out if they are really doing what they say they are doing."

Author: Diana Zho,  Senior Risk and Compliance Manager

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com