The Australian Securities and Investments Commission (ASIC) has taken aim at greenwashing in recent months, issuing infringement notices to Vanguard, Black Mountain Energy, and launching court action against Mercer Superannuation, with ASIC chair Joe Longo warning of more to come.
But Morningstar ESG lead Erica Hall said that while greenwashing is an “insidious scourge” that corrodes long-term trust and credibility, it remains tempting for asset managers seeking to capture funds.
“Asset managers typically seek to gather assets, and fees earned are often based on the volume of funds under management, so it makes sense that they would want to capture funds that are being deployed into sustainable investing,” Ms Hall said.
“There is no question of the rising popularity of sustainable investing; we see it in Morningstar's data, and each quarter, new products are launched and more capital is deployed into sustainable strategies.”
The lack of clarity around what exactly constitutes a green investment, Ms Hall said, has added to confusion and resulted in some unintentional greenwashing.
“There is no universal, accepted standard for sustainable investing. It is estimated there is upward of more than 200 different ESG taxonomies in existence, which can make it difficult to undertake meaningful comparisons and to ascertain the extent of a fund’s greenness,” she said.
“ASIC helped to provide clarity to the local industry by releasing an information sheet targeted at superannuation and managed fund issuers on how to avoid greenwashing when offering or promoting sustainability related products.”
The response has been some asset managers and super funds simply walking away from what they saw as onerous green commitments.
Another side effect of the heavy focus on greenwashing, according to Ms Hall, is greenhushing.
“When engaging with asset managers, Morningstar has recently seen a softening of language around green claims. An unintended consequence of the focus on greenwashing has likely contributed to the rise of greenhushing, which is the antithesis of greenwashing,” she said.
The concept of greenhushing is that firms choose to underreport or hide their green credentials to avoid public scrutiny.
“Whilst it seems incongruous at first glance, there are various reasons, such as simply underpromising and overdelivering to investors,” Ms Hall said.
“After all, it is almost impossible to please all the people all the time, and the more you raise your head above the pulpit, the more you risk getting your head chopped off.
“Further, as investing sustainably has become contentious in some circles, greenhushing is a way to fly under the radar and escape backlash from those who see sustainable investing as a modern-day example of woke capitalism.”
Ms Hall added that Australian regulators are unlikely to reduce their focus on greenwashing, so asset managers will need to ensure any green claims are backed by evidence.
“The temptation to overreach and exaggerate could cost investment-product providers dearly in a hit to reputation and to the hip pocket via monetary fines,” she said.
“All in all, the increased focus on greenwashing is good for the industry, as it should help to provide confidence to investors seeking sustainable investments as to whether those claims purported are indeed accurate.
“However, greenhushing is a phenomenon to watch closely, as it is also detrimental to the transparency and credibility of the investment management industry as it pertains to sustainability.”