Looking under the green bonnet

ESG greenwashing RIAA Carola van Lamoen robeco Pengana Steven Glass Marion Poirier MFS Investment Management Newton Investment Management Andrew Parry The Ethics Alliance Cris Parker Lucy Steed RBSC

2 October 2020
| By Laura Dew |
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As more and more assets are added to funds focused on environmental, social and governance (ESG), it is unsurprising firms want to capitalise on this theme. But without a clear classification system in place, it can be difficult to distinguish whether a fund is actually providing a positive impact.

There are currently multiple different types of ESG funds such as ESG, ethical, environmental, responsible and sustainable versions across both active and passive funds. 

However, the lack of understanding between these different versions among investors means firms can find themselves guilty of a process known as ‘greenwashing’. 

Greenwashing refers to when a firm launches a fund to capitalise on market demand for environmental, social and governance products but fails to adhere to the stated ESG principles. This can lead to investors feeling misled when the fund fails to meet their objectives or align with their values. 

According to the Responsible Investment Institute Australasia (RIAA) annual benchmark report into responsible investing, mistrust or greenwashing concerns was one of the key deterrents restricting growth of assets into responsible funds in 2019, unchanged from 2018 at 19%. 

However, there is a move for this classification confusion to be clarified as the CFA Institute has launched a consultation paper on the proposed scope, structure and design principles for ESG disclosure standards for investment products. The Standard, as it is known, would help to reduce inconsistency and variation in ESG-related investment approaches and disclosures and a draft was due in May 2021.

CFA Institute chief executive, Margaret Franklin, said: “With growing interest in ESG investing, support is widespread from the investment community for the development of a standard to reduce confusion and facilitate better alignment of investor objectives with investment products.

“Setting global industry standards to ensure transparency and safeguard trust is integral to our mission and will help consumers to make more informed decisions about investing in ESG products.”


The Australian ESG market is worth $1.15 trillion, up from $630 billion in December 2014, so there is a large market for firms to capture. However, just putting a label on a new fund or converting an existing strategy does not make a fund ESG aligned. 

Carola van Lamoen, head of Robeco’s sustainable investing centre of expertise, said: “Greenwashing is a term that is becoming more common these days, and refers to the false pretence of the positive impact of financial products. 

“Often, it turns that out that sustainability-marketed products only apply simple exclusions and are still labelled as being sustainable, while no other methods are applied.

Another commonality is a lack of transparency provided, and unclarity about what for example, exclusion lists exist or, how companies are measured on sustainability performance, and if positive and negative effects are properly measured.”

Whether a fund was guilty of greenwashing was a matter of personal perspective, however, as what was classed as ESG varied between people depending on their expectations.

Steven Glass, deputy portfolio manager at Pengana, said: “Greenwashing is in the eye of the beholder, firms don’t necessarily do it deliberately. They are usually working within a specification and genuinely believe they are doing the right thing but then the investor disagrees.

“People aren’t evil, they aren’t lurking in corners and trying to rip people off. ESG is part of the market and if people are demanding it, then companies will try to create something to satisfy that demand. It doesn’t mean they aren’t trying to do the right thing, they are just trying to capitalise on a theme,” he said.

Referencing the idea that ESG was an in-demand buzzword for investments, the RIAA said the number of ‘self-declared responsible investors’ had risen from 120 in 2018 to 165 in 2019. 

“[There is] a resounding message from Australian consumers: most expect super funds, banks, financial advisers and other financial institutions to invest their money responsibly and ethically,” RIAA said. 

“Investment managers’ increased appetite for pursuing responsible investment approaches – or at least for communicating to consumers that they are practising responsible investment – is evidenced by the fact that this report’s population of self-declared responsible investors has grown from 120 in 2018 to 165 in 2019.”

Glass highlighted two fund portfolios types that he had noted which could be viewed by some as greenwashing. The first one was utilised by passive funds where they held large US technology companies such as Facebook as they had a good ESG score or were held in an ESG benchmark. While the company met criteria such as lack of weapons, tobacco or alcohol production, certain actions by the company in recent years could be viewed as ‘morally dubious’ and often came scrutiny from responsible investors.

The second was when firms tried to “stuff their fund full of positive impact companies” such as renewable energy and biotechnology. While this was a noble aim, asset managers needed to remember ESG aims should not compromise financial performance. 

“That’s wonderful,” Glass said. “But it’s not being responsible, just because its positive impact does not mean they will perform as many of those stocks are very expensive nowadays. People focus on the ESG angle and then forget the investing part. People do still want to make money from their investment.”

There have been numerous studies over the years that have shown investing responsibly or with an ESG focus need not mean compromising in financial performance, particularly as these type of funds gain longer track records to examine. 

RIAA data found the average Australian share responsible fund has returned 24.7% over one year, 10.1% over the past five years and 9% over 10 years, beating the ASX 300 over all time periods.

Marion Poirier, managing director of MFS Investment Management for Australia and New Zealand, said: “There are a lot of things that ESG is not. For instance, it is not ‘irresponsible divestment’ whereby companies become targeted when they are not always the main culprits.

“Conversely, when it comes to opportunities, which is often an overlooked side of ESG research, it may not always be the ‘no-brainer’ companies which hold the most upside. It’s about integrating ESG into valuation and engagement and separating valuations from values.”


One of the most important things for firms to remember if they want to ‘walk the talk’ on ESG is to have a transparent and rigorous process and framework which details their ESG goals and how these are going to be implemented. 

This is one of the drawbacks of the United Nation’s Sustainable Development Goals (UN SDGs), a common measure for funds, as they are not meant for private investors so do not insist on reporting requirements or targets. 

Newton Investment Management head of sustainable investment, Andrew Parry, said: “A lack of focus is a cause for concern when the goals are not integrated into business plans and not supported by the setting of measurable target outcomes.

“This lack of detail and commitment also puts into context the limitations of the mapping to SDGs in public equity or credit portfolios when the reporting and intention is so limited at a company level.”

Cris Parker, head of The Ethics Alliance, said: “If a firm is not fully transparent then it is hard to measure whereas if you disclose everything fully at the outset then investors know what they are getting so transparency is absolutely key.

“ESG principles should be applied across the whole company as if one element isn’t right then that is reflected elsewhere. Good intentions are not enough, there needs to be a consistent framework that shows what you are doing, how you are going to track it and how you intend to deal with any unintended consequences that arise.”

This was echoed by van Lamoen who said it was important that a company’s staff were knowledgeable and trained up on ESG so they were capable of integrating ESG information into the investment process to allow for sound decision-making.

For MFS, being an active manager meant taking an active and engaged approach when selecting a fund. 

“We caution against an overreliance on narrow or blunt measurement tools, which cannot be expected to capture the nuance and range of ESG risks and opportunities faced by companies. Knowing where we allocate client money is critical and we must then be a responsible owner on their behalf. This includes both proxy voting and engaging with them on E, S and G issues,” Poirier said.

However, there is debate over the importance of engagement as Glass felt Pengana would rather be investing in a good company in the first place rather than one that requires ongoing engagement. This may depend on how big a company is and the resources available that they can dedicate to engagement. 

“Investors want to see engagement, transparent reporting and degree of positive impact companies. This has changed over the years but sometimes I think people are over-emphasising the engagement part. We can’t spend all of our time engaging with our companies. For us, we would rather have companies which pass in the first place.”


The biggest responsibility on the part of investors is to do effective due diligence on a potential fund and ‘look under the bonnet’ of what a fund is holding. This includes looking at their full holdings, looking at company reports and looking at sustainability reports.

This is an area of improvement for Australian funds compared to their European counterparts as transparency of full holdings beyond the largest 10 is not always readily available. Of the 165 investment managers in the RIAA’s responsible investment research universe, only 36% disclosed their full holdings and a further 36% failed to disclose any of them.

Simon Webber, portfolio manager at Schroders, said: “There is some reporting being done but it takes openness on the part of companies. It is very patchy and could be improved a lot”.

Another reason for the deep dive is that it is not easy to rely on the fund’s label and assume all ESG funds are similar as they can vary significantly. This is particularly the case for passive funds which could be holding thousands of stocks to track an ESG benchmark – it is unlikely 100% of those companies would align meet investors’ objectives.

Van Lamoen added, for this reason, it could be valuable to examine third-party data of funds.

“Interpreting the wide range of sustainability integration methods, might not always be easy. Therefore, you could look at external verification mechanisms ranging from assessment on product level by Morningstar, as reading the Principles for Responsible Investment assessment results,” she said.

“When reading through fund reports you can learn about how sustainable investment objectives are fulfilled.”

Parker said: “There is nothing worse than making a choice and then finding out there were hidden truths, that just makes them look like they aren’t a legitimate company and are covering up mistakes”. 


Melior’s director of investment management, Lucy Steed, shares questions investors should ask when selecting an ESG fund: 

  • What is the definition of excluded industries? Some fund managers say they avoid fossil fuels but when you look at the definition, it only excludes thermal coal. What about gas and oil? What exclusion revenue thresholds are being applied? Is it 30% or 5%? Do the exclusions consider supply chains such as distribution or just manufacturing?
  • What are some examples of how the fund has reacted to negative ESG events? Did they engage, did they exit? How did they form their views and demonstrate their ESG commitment?
  • How is the fund manager aligned to ESG outcomes? Is the manager remunerated on financial performance alone or are they also aligned to ESG outcomes? 
  • Does the fund manager walk the talk? Do they for instance have a diverse investment team and have carbon neutral operations? How do they live the values?
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