The rising trend of ESG-focused investing has led to a large increase in funds being marketed as such. Upon closer inspection, however, many of these so called "ESG" funds prove not as friendly to the ESG cause as they claim. In recent years, a London-based climate change think tank, InfluenceMap, accused the majority of these funds of overstating their sustainability claims, a phenomenon known as "greenwashing." Even the former CIO for sustainable investing at BlackRock Inc., Tariq Fancy, stated that "sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community (see here for more details).”
As a result, the SEC released proposals in May to crack down on greenwashing by preventing misleading or deceptive names (see here) and by enhancing disclosures to investors (see here). Such regulation changes will hit the desks of compliance professionals who, like investors, will be challenged by the inherent subjective and non-quantifiable nature of ESG classifications. However, ESG data is not that different from a lot of other investment data in its subjectivity. Look at the 2008 financial crisis—so many "investment grade" securities turned out to not be solid investments after all, despite the data. Regardless of its subjectivity, it will likely soon be required for ESG to be quantified in some way, perhaps with a method similar to measuring credit quality.
At IMP, we expect ESG to emerge as a specialty for us as our investment firm clients navigate new territory. Compliance professionals are inevitably going to play a big part in the push to start collecting, housing, and utilizing ESG data. Fortunately, our team is prepared to help. Collectively, we have experience dealing with countless compliance issues that can arise from subjective data measurements such as credit ratings. We can expect in the near future to be aiding in implementation, testing, and maintenance of ESG-focused additions to everyone’s compliance rule libraries.