As companies race to secure market share among increasingly eco-conscious consumers, it is hardly surprising that allegations of “greenwashing” are on the rise. But the risk that green credentials are overstated is not only limited to consumer markets. Given the speed at which efforts are being made to use the market economy to drive environmental progress, it is also a risk that applies at institutional level, and one that should be on the radar of UK pension scheme trustees.
Regulatory concern about greenwashing is clear. For example, the US Securities and Exchange Commission recently published proposals to require investment advisers to make specific and standardised disclosures regarding their ESG strategies, and the European Securities and Markets Authority has also recently published a supervisory briefing aimed at ensuring convergence across the EU in the supervision of investment funds with sustainability features.
Why is greenwashing of concern to UK pension scheme trustees?
It has been well publicised that trustees of the largest UK pension schemes need to make climate-related disclosures and carry out analysis of the environmental impact of their portfolios. This currently only applies to authorised master trusts, collective money purchase schemes and schemes with assets of £5bn or more, but is going to extend to schemes with assets of £1bn or more from 1 October 2022.
In carrying out this analysis schemes will need to access and rely on underlying ESG data and analysis produced by corporates, asset managers and investment consultants. The quality of that data will be crucial to the trustee’s disclosures on the environmental impact of their fund’s portfolio. Does the data accurately and fully describe the ESG impact of the scheme’s investments?
It should be kept in mind that some of the ESG analysis and conclusions reached by UK pension scheme trustees (e.g. scenario analysis and metric calculations) are required to be included in mandatory climate-related disclosures. Where does the responsibility lie if those calculations ultimately turn out to be inaccurate because of overstated ESG characteristics in the underlying investments? This carries a regulatory risk for trustees, as well as a risk of member complaints and litigation as climate issues grow in importance for individuals.
Another issue might be where trustees make available self-select options which purport to take into account ESG considerations to a greater extent. Do these options genuinely do as they claim? If they do not, might the trustee have some responsibility to individual members who have chosen to invest in a particular fund based on that understanding?
How can trustees protect themselves against these risks?
The first key point is to be alive to the possibility of greenwashing. Just as consumers are having to wake up to the fact that packaging labelled as “recyclable” may not be in all circumstances, so trustees should be aware that it is possible that not all ESG claims in the investment sphere are necessarily accurate either.
Trustees should also understand the importance of due diligence in the investment decision-making process. This extends from the trustee’s questioning of their investment consultant to understand the scope of the consultant’s due diligence, to understanding the level of integration of ESG issues within investment manager processes themselves. While trustees are not expected to be ESG experts and will necessarily need to take specialist advice, they should feel able to question any ESG-related claims that are being made in order to establish their accuracy.
So, while it will take time for ESG reporting and disclosures for investment funds and managers to become standardised, trustees can take steps now to protect themselves from the risk that their investments are not what they say they are on the (ESG) tin.
For further information, please contact:
Alison Goudarzi, Linklaters