Without hard, consistent rules on what greenwashing is, it is difficult to punish firms for falling short. There have been controversies – last year US regulators reportedly probed Deutsche Bank’s asset management business, DWS Group. The firm’s former head of sustainability claimed that it exaggerated how it used sustainability measures to manage assets. DWS has strenuously denied the claim.

As this writer and other journalists will testify, the term “ESG” (environmental, social and governance) is red hot. It has reached the point where it is downright contrarian, even risqué, for a wealth manager not to talk about the subject. Regulators such as the has reportedly (10 February) removed more than 1,200 funds with a combined $1.4 trillion in assets from its European sustainable investment list after an “extensive review” of their legal documents. Last November, Morningstar published a report following on from the EU’s rules on sustainability disclosures implemented in March 2021. The paper said that the European sustainable fund universe had expanded by 65 per cent between June and September – from 3,730 to 6,147 funds. The FT report last week said that assets under management, Morningstar funds considered to be sustainable at the end of September 2021, tumbled to $2.03 trillion from $3.4 trillion following the adjustment. (This news service has contacted Morningstar to verify the report and add details, and may update in due course.)

Morningstar’s views are important because such firms provide benchmarks and guidance that wealth advisors, helping clients navigate a vast menu of fund choices, rely on. It also casts light on how reliable client reporting is a vital differentiator for wealth manages, and that ESG/sustainable investment ideas add a new layer to this.

In the back of some people's minds may be the worry that just as banks and investors were wrongfooted by allegedly biased ratings of sub-prime mortgages before the 2008 financial crash, bias and conflicts of interest in rating funds as “sustainable” could cause problems down the line. This week, a figure in the investment sector told this news service that a large number of so-called “green bonds” issued by governments and similar entities might struggle to give clients any return because they were sold at expensive levels, riding the wave of enthusiasm about “cleantech” such as solar power. With inflation and interest rates rising, more starry-eyed sales pitches for green bonds may leave some creditors feeling queasy. And regulators have another problem: if “green” investments prove to be a bust or underperform, are such assets “suitable” for retail investors, as regulators require? It is not too much of a stretch to wonder if some “sustainable” sales pitches come close to mis-selling. 

Alarms about valuations of “sustainable” tech have been fired from a number of quarters. Last year the , the Boston-based analytics and research firm, has noted that nearly half of asset owners are now asking allocators to report on the carbon intensity of a portfolio and provide security-level exposure to climate risk. Around a third of managers want data in the next two years that includes scenario-testing metrics for climate change. That is a lot of work, and it isn’t free.

With all this noise around ESG, sustainability and “green bonds,” perhaps inevitably, comes potential for sharp practice. A danger is that if greenwashing isn’t addressed thoroughly, it will derail efforts to harness the engines of capitalism to clean up the planet. And with policies such as Net Zero proving a tough political sell at a time of skyrocketing energy costs and question marks about the viability of reducing C02 emissions, such a derailment will leave a sour taste in the mouth. It is no wonder that regulators are acting.