The lurking risk of greenwashing in Canadian funds

With regulators becoming increasingly sensitive to the threat of greenwashing, a new report from DBRS Morningstar finds a wide range of investment strategies and transparency among Canadian ESG funds.

According to the report, ESG investment approaches “differ widely” at funds in Canada. There’s also a stark divergence in the transparency these funds provide to investors, it noted.

“Currently, Canadian asset managers have wide discretion as to how ESG funds should be composed and what ESG approach they wish to follow, which can result in a lack of comparability and confusion for investors,” said Komal Rizvi, vice-president, financial institutions group, at DBRS Morningstar in a release.

The report said the lack of high standards around an ESG fund’s requirements “may make it too easy for a fund to be classified as responsible.”

This lack of clarity and transparency also represents a risk that firms could face greenwashing allegations.

“This fear is well founded given that a number of companies globally have been subject to investigations or have already been fined for false marketing and misrepresentation vis-à-vis their ESG funds,” the report said.

Given the growing risk of greenwashing allegations, “it becomes important that an asset manager stands behind the robustness of its ESG investing approach and is able to communicate the validity,” Rizvi said.

From a credit ratings perspective, while the existence of ESG funds is generally seen as a positive for asset managers, DBRS said the risk of greenwashing accusations that could result in reputational damage and/or a negative impact on earnings represents a downside risk.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.