ESG: How Can Clients Avoid 'Greenwashing'?

As environmental, social and governance (ESG) principles become increasingly mainstream and with asset managers under increasing pressure to embrace the trend, the number of fund launches featuring ethical and sustainable credentials has grown significantly in the past few years. However, the ESG term itself may still be somewhat perplexing for investors, especially given the proliferation of ESG definitions.

Although there is no single, widely accepted definition of what ESG principles represent or encompass, a number of international initiatives have been undertaken in the past 15 years in order to clarify the practical meaning and implications of sustainability for investors.

A number of governments, though their relevant regulators, have put in place different programmes and initiatives encouraging and even subsidising the activity of various stakeholders to ESG and other sustainability issues in the context of their business activities by either introducing new, or strengthening/expanding existing, initiatives and/or regulatory frameworks.

Transnational initiatives have also been put forward recently in an effort to both harmonise and clarify the nature, breadth and scope of ESG principles and assist multi-governmental efforts aiming to apply them domestically in a coherent manner. The United Nations' Principles for Responsible Investment (PRI) is an established body, comprising more than 2,500 members from over 50 countries and representing over USD 70tn assets under management, which established six principles for responsible investment (Principles for Responsible Investment). Although the Principles for Responsible Investment are "voluntary and aspirational" in nature and do not provide any enforcement and/or sanction mechanism per se, signatories are still expected to report on the extent of their compliance with such principles by way of annual reporting and continuing self-assessment processes. Investors, especially institutional investors, are thus now in a position to require investment managers and advisors to disclose and evidence their membership to the PRI and compliance with the Principles for Responsible Investment.

The growing awareness of, and interest in, environmental, social and governance principles has also led to the development of the United Nations Sustainable Development Goals (UN SDGs) in 2015. The UN SDGs provide a much-needed and detailed...

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