Interest in environmental, social, and corporate governance (ESG) investment continues to surge in 2021, as more investors have looked to put their money into products that profess to promote ESG values. One change, however, has been a move toward fixed-income funds as compared to equity products. As more ESG bond funds enter the market, the risk of “greenwashing,” the practice of providing misleading information regarding the sustainability credentials of their products, is likely to play an even greater role.
The sale of ESG bond funds globally rose to $54 billion from January to May of 2021. In 2020, the total sale of these funds was $64 billion, which was itself a 12% increase over the previous year. In the US, the 2021 total sales were at $4.75 billion at the end of May, compared to $5.92 billion in 2020. As this trend continues, and more ESG bond funds enter the market, there will almost certainly be increased attention on the potential for greenwashing. The threat of greenwashing is heightened by the lack of reliable, comparable ESG data and standards.
Regulators across the globe have identified greenwashing as a risk. In June, the International Organization of Securities Commissions, which is composed of securities regulators from the Americas, Europe, and Asia, issued a report in which it proposed recommendations for increased scrutiny on greenwashing by asset managers. In Europe, the Sustainable Finance Disclosure Regulation, which began to go into effect in March of 2021, requires firms to disclose the sustainability impacts of their investment decisions in an effort to combat greenwashing. While the US has lagged Europe in focus on ESG and sustainability regulations, in March 2021, the US Securities and Exchange Commission’s Division of Examinations issued a risk alert detailing observations from recent exams of investment advisors, registered investment companies, and private funds offering ESG products and services, in which it signaled that it is prioritizing review of misleading ESG practices.
As general momentum behind ESG soars, it is likely that the supply of ESG bond funds will continue to increase, an exciting trend for both investors and for society, as these bonds will, hopefully, drive innovation that will lead to a more sustainable future. It is critical, however, that investors and firms are closely watching as standards for ESG investment practices continue to evolve to address the heightened risk of greenwashing in ESG products and services.