Managing the risk of greenwashing in asset management

In the asset management sector, environmental, social and governance (ESG) risks play a critical role: they can have a negative impact on the value of a financial instrument, causing a decrease in profitability.

 

Von Helen Tschümperlin Moggi
Head of Finance Area, Centro Studi Villa Negroni

 

In recent years, the demand for sustainable financial products and services has increased considerably: with a market share of 52%, so-called 'sustainable' funds exceeded collective investment schemes without reference to sustainability for the first time in 2020.

In this context, there is an increased danger of investors being misled, intentionally or unintentionally, about the sustainability of financial products and/or services (so-called greenwashing). In the distribution of financial products and services, FINMA has indeed found that providers often make vague or even misleading promises about the sustainability of their products.

In the asset management sector, the risk of greenwashing can occur throughout the value chain that includes the organisation (entity level), the product (product level) and distribution (point of sale).

At the entity level, greenwashing can occur when established investment processes are lacking or when controlling, risk management or ESG data analysis are inadequate. To promote sustainable asset management and to demonstrate that companies’ practices support the promises visible in marketing documents, the Asset Management Association (AMAS) and Swiss Sustainable Finance (SSF) have developed recommendations on sustainable asset management to help asset managers integrate sustainability into their products and services[1]. At the strategic level, the management of investment companies should create a solid internal governance framework for ESG risks and ensure that there is adequate oversight and accountability for these risks at the company level. It is also suggested to include a description of the resources, processes and tools used for all ESG risk identification and management.

At the product level, greenwashing occurs when the sustainability practices or characteristics of an investment product are described in a non-transparent or erroneous manner. In order to prevent greenwashing risks at the product level, AMAS and the SSF suggest minimum conditions that a product must fulfil[2], while also providing an overview of the ability of different sustainability approaches to meet clients' objectives.

At the point-of-sale level, greenwashing occurs when erroneous or deficient information about product sustainability is given in the advisory process. The Swiss Bankers Association (SBA) has defined guidelines for the integration of ESG criteria in the advisory process for private clients[3]. Basically, the advisor ought to understand what the client's objectives are in terms of sustainability, so that their expectations match the actual characteristics of the investment product. Clients' objectives are heterogeneous and cover various dimensions: the achievement of a better risk-adjusted return, the eventual achievement of a positive impact and/or alignment with one's own moral values.

It can be seen from the above that the challenges are numerous, not least due to the lack of a universally valid definition of 'sustainable financial investment'. Furthermore, the scientific basis for the impacts of different investment strategies on sustainability is not yet solid. However, it is clear that professionals active in asset management and financial advice are interested in reducing the risks of greenwashing, helping to prevent the occurrence of reputational risks that could seriously damage the entire Swiss financial centre. Specialised lifelong education is a valuable aid in raising awareness of this risk and qualifying professionals in their skills.

 

Biography

Helen Tschümperlin Moggi is responsible for the Finance Area at the Centro Studi Villla Negroni, where she lectures and designs courses in banking and finance for professionals based mainly in Ticino. In this context, she is co-director of the CAS "Risk Management in Banking and Asset Management" and of the "CAS Wealth Management and Sustainability" organised together with the Università della Svizzera italiana (USI). She is a member of the "Education" Workgroup of Swiss Sustainable Finance and lectures for SUPSI within the Bachelor of Business Administration.

 

[1] Sustainable Asset Management: Key Messages and Recommendations of SFAMA and SSF, 16 June 2020

[2] Asset Management Association, Swiss Sustainable Finance, Recommendation on Transparency and minimum requirements for sustainable investment approaches and products, December 2021

[3] Guideline for the integration of ESG considerations into the advisory process for private clients, June 2020