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Regulators target “greenwashed” products susceptible to marketing hype

Investment Executive | James Langton | May 17, 2021

crystal ball earth - Regulators target “greenwashed” products susceptible to marketing hypeThe ESG investing space has become increasingly susceptible to marketing hype

Sustainable investing, like any other hot retail investment trend, is vulnerable to hype. Regulators now are stepping up their efforts to ensure investors are getting what they’re promised from environmental, social and governance (ESG) investments.

When ethical investing was a fringe activity, regulators didn’t have to worry too much about what was going into investment funds that promised green or socially conscious investments. The firms involved in the space were mostly true believers in the cause of responsible investing, and the assets at stake were relatively modest.

However, as ESG investing goes mainstream, it’s become increasingly susceptible to marketing hype designed to drive sales rather than meet investor needs.

See:  The evolution of ESG: Corporate sustainability leaders in the financial services sector are taking on new responsibilities

This danger has not escaped the attention of regulators. In recent weeks, members of the Canadian Securities Administrators (CSA) — including both the Ontario Securities Commission and the British Columbia Securities Commission — have been reviewing fund managers’ ESG activities to ensure that what they’ve stated in their marketing materials matches what’s in their portfolios.

“The CSA is currently doing a sweep on marketing practices of registrants to monitor their compliance with securities laws,” said Ilana Kelemen, senior advisor, communications and stakeholder relations with the CSA. “We further focused the scope of our review of investment fund managers [to concentrate] on the marketing materials for ESG products and services.”

The results of the CSA’s reviews are expected by end of the third quarter, Kelemen said.

Similar concerns about the ESG activities of portfolio managers and investment advisors were the focus of recent compliance work by the U.S. Securities and Exchange Commission (SEC). That regulator uncovered a variety of issues, including “potentially misleading” communications from firms to investors about ESG investing processes and their adherence to global ESG practices.

The SEC also found firms that had inadequate or inconsistent approaches to implementing both positive and negative portfolio screens; had proxy voting that diverged from stated practices; made baseless or misleading performance claims; or had poor internal controls and compliance programs to adhere to the global ESG standards they claimed to be following.

See:  New SEC task force will scrutinize ESG and climate disclosures and marketing

The SEC also found some funds’ portfolios were heavily populated with companies that carried poor ESG scores despite promising investors the opposite.

Time will tell if the CSA turns up similar issues during its compliance reviews, but regulators around the world are paying more attention to investor protection in the growing sustainable investment market.

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