To greenwash, or not to greenwash. That is the question. Green, sustainable, ethical, responsible, environmentally-friendly... these are all words used by managers to describe their funds. As both investors and the wider world become increasingly concerned with sustainability, it is tempting to emphasise a fund's ESG credentials to attract more capital.
This, however, is a terrible idea.
Misleading investors on ESG isn't just unethical, it's bad business practice. Whether intentional or not, managers committing this marketing sin expose themselves to a host of commercial and regulatory risks – which, themselves, have commercial consequences.
Let's consider four of these risks through a commercial lens. After all, a manager's belief that when they do greenwash it will help them raise more capital is what tempts them into it in the first place.
- Investing is a relationship business – especially in the private markets – and relationships are built on trust. Honest and authentic communication is vital. By overemphasising the greenness of a fund, you are undermining the trust on which your relationship is being built.
Unfounded and misleading claims will be uncovered during due
diligence and these broken promises will be difficult to recover
from.
- Sustainable investing was once associated with forfeiting or compromising on returns. For most investors this is no longer the case. Now, performance and ESG are seen to go hand in hand. By claiming your fund is greener than it really is, you are misleading investors looking to capture that performance. You are committing the fund to ESG-related performance outcomes which are unlikely to be met. Investors will not forget that disappointment.
- Marketing is a competition for time and attention. Winning this competition requires differentiation and authenticity. Differentiation is nigh on impossible when your ESG statements are clichéd and unless your ESG writing is authentic – based on the things, unique to your firm, you have really done or are planning to do – it will almost certainly be clichéd. Marketing that isn't effective is wasted time, money and effort.
- Greenwashing is now a key area of focus for regulators; scrutiny and fines are likely to increase. Recently, the SEC fined BNY Mellon's Investment Adviser $1.5m for "misstatements and omissions" about its ESG considerations, and the German asset manager DWS was raided by police officers following claims of greenwashing. Nobody wants to have a conversation with their investors about why they were fined...
So, if you must not greenwash, how should you communicate around ESG?
Investors are more likely to believe your positive ESG claims when you are also seen to own up to the challenges, past, present and future. Being honest about your ESG journey is vital to building trust with your clients and ensuring your overall fund marketing is believable. Far better to show an authentic direction and speed of ESG travel, than make unfounded claims that will easily be debunked.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
