Bait and switch: How ESG investors get duped

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Opinion

Bait and switch: How ESG investors get duped

The world’s second-largest investment management Vanguard risks becoming a serial infringer for greenwashing in Australia, having now been twice pinged by the regulator for taking excessive poetic licence when marketing its ESG (environmental, social and corporate governance) product credentials.

And the watchdog’s crackdown on asset managers misrepresenting financial products as environmentally and socially pristine is still in its infancy.

What investors want to avoid.

What investors want to avoid.

The lack of clear and consistent standards of what defines ESG is part of the problem and enables financial consumers to be sucked into a bait and switch. Consumers are being duped into thinking their investments are being directed towards saving the planet, or away from alcohol or gaming companies.

But the screening process is often plagued with holes.

To date, the Australian Securities and Investments Commission has targeted for legal action only two firms, Vanguard and one of the country’s highest profile and respected asset managers, Mercer Super Australia, over allegedly misleading customers about screening out unethical investments.

Investment managers have become increasingly adroit at marketing the ESG hygiene of their investments – claiming no nasties such as fossil fuels, tobacco or gambling.

It certainly feels like ASIC has set its sights on the big fish in targeting Mercer and Vanguard.

They understand that a mushrooming group of people want to invest for good and do their small part for a better environmental and social future while receiving a competitive return – and they pay fees to asset managers to find investments that meet that criteria.

To be slipshod about applying a robust screening process is an abuse of trust – even if the outcome wasn’t intentional.

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Making such claims brings with it a responsibility to engage in a pristine check of what’s in the investment portfolio.

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For example, to screen out fossil fuel companies but allow investments in oil pipeline companies flirts with being disingenuous.

The latest Vanguard action is around a bond fund it marketed in Australia – the $1 billion Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

However, ASIC says the fund was exposed to the Abu Dhabi Crude Oil Pipeline; Chevron Phillips Chemical Co; Colonial Pipeline Co (which pipes oil products); Chilean oil explorer and producer Empresa Nacional del Petroleo SA; and a gas-fired electricity generator, John Sevier Combined Cycle Generation.

It certainly feels like ASIC has set its sights on the big fish in targeting Mercer and Vanguard. Vanguard has previously received an ESG speeding fine from ASIC, but for the paltry sum of $39,960. For a global company with funds under management of $11 trillion, this infringement won’t act as a disincentive.

In total, ASIC has levelled $140,000 of infringement notices across the industry for greenwashing, so it’s fair to say that it’s not a revenue spinner for the regulator or a financial hardship for the alleged perpetrators.

ASIC has levelled $140,000 of infringement notices across the industry for greenwashing.

ASIC has levelled $140,000 of infringement notices across the industry for greenwashing.Credit: Jim Rice

Mercer and Vanguard appear to have been low-hanging fruit for the regulator.

ASIC alleged Mercer made statements on its website about seven “Sustainable Plus” investment options offered by the Mercer Super Trust, of which Mercer is the trustee. These statements marketed the Sustainable Plus options as suitable for members who “are deeply committed to sustainability”, because they excluded investments in companies involved in carbon-intensive fossil fuels such as thermal coal and companies involved in alcohol production and gambling.

But the Sustainable Plus portfolio was littered with fossil fuel companies including Glencore and Whitehaven Coal; alcohol companies such as Budweiser Brewing and Treasury Wine Estates; and a conga line of gaming companies such as Caesars and Tabcorp.

It would be fair to assume that given the number of products that are marketed as ESG-friendly, there are plenty of others that could be in breach of those claims.

Making representations about ESG can be a box-ticking exercise rather than the result of forensic investigation.

Indeed, Vanguard self-reported the breach to ASIC. “While the fund was managed by Vanguard in alignment with the index methodology, Vanguard identified that the descriptions of the exclusionary screens published by the index provider and within Vanguard’s product disclosure statement [PDS] were not sufficiently detailed,” it said in a statement on Tuesday.

“At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark. As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.”

The optics for any branded money manager fighting ASIC on greenwashing would be ugly.

This explains why ASIC says it hasn’t had a sizable fund vigorously contest an alleged breach.

Fund managers are better served by opening their mouths and taking the regulator’s medicine.

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