Greenwashing – what’s the harm?

• Green
• Sustainable
• Ethical
• Responsible
• Environmentally friendly

Too often, we see fund managers using the same language to describe their funds.

Sustainability is a hot topic. Investors are becoming increasingly concerned with how their investments score and it is tempting to exaggerate a fund’s ESG credentials to attract more capital.

But this is a terrible idea.

Misleading investors about ESG isn’t just unethical, it’s bad business practice.

Whether intentional or not, managers who commit this marketing sin expose themselves to a host of commercial and regulatory risks and consequences.

For many UK firms or those marketing to UK retail investors, exaggerating sustainability claims is in direct violation of the FCA’s new anti-greenwashing rules announced as part of the Sustainability Disclosure Requirements (“SDR”). Make sure you’re not caught out: check if you fall under these requirements.

In short, greenwashing harms your business.

Let’s consider four of these risks through a commercial lens:

1. Investing is a relationship business – especially in the private markets – and relationships are built on trust. Trust requires honest and authentic communication. By overstating the greenness of a fund, you undermine the trust upon which your relationship is being built.
   Unfounded and misleading claims will be uncovered during due diligence. These broken promises will be difficult to recover from.
2. In the not-too-distant past, sustainable investing was associated with lower returns. For most investors, this is no longer the case. Now, performance and ESG are seen to go hand-in-hand.
   Claiming your fund is greener than it really is misleads investors who are 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.
3. Marketing is a competition for time and attention. Winning this competition requires differentiation and authenticity. Differentiation is almost impossible when your ESG statements are clichéd and hollow.
   Effective messaging must be true to you. It must be based on the unique things you have done or are planning to do. Ineffective marketing is just wasted time, money, and effort.
4. Greenwashing is now a key area of focus for regulators; scrutiny and fines are likely to increase. Recently, the SEC has fined multiple market participants for misstatements and omissions related to ESG.
   Nobody wants to have a conversation with their investors about why they were fined…

So, with all this in mind, how should you communicate around ESG?

Build trust with investors by transparently owning up to your challenges - past, present, and future. Being honest about your ESG journey is vital to building confidence with your clients and ensuring your overall fund marketing is credible. It is far better to show an authentic direction and pace of ESG progress, than make unfounded claims that will easily be debunked.

Reach out if you need help. We offer impact and sustainability knowledge that is unparalleled. Our team of over 150+ specialists in ESG, climate, sustainability, and impact, through our ESG sub-brand Holtara, is directly linked to our IR and Marketing  Solutions team. We can assist with everything from ESG assessments, frameworks, and regulations to effectively communicating these aspects to your investors.