A number of fund strategies have come out to capitalize on the growing popularity of socially responsible investments that track factors like environmental, social, and governance principles, but the final investment products may not always adhere to strict ESG criteria.
The European Securities and Markets Authority (ESMA) has urged the bloc’s executive European Commission to set new rules to regulate ratings on ESG aspects of companies, Reuters reports.
These set rules would then help asset managers make ‘green’ investment decisions.
“The market for ESG ratings and other assessment tools is currently unregulated and unsupervised,” ESMA said in a statement. “When combined with increasing regulatory demands for consideration of ESG information, there are increased risks of greenwashing, capital misallocation and products mis-selling.”
Greenwashing refers to providing a misleading impression of green credentials, or suggesting a socially responsible purpose without sticking to the spirit of the investment thesis.
Some ESG fund products may include traditional fossil fuel energy companies that are still engaged in the crude oil industry. While these companies would obviously fail the ‘environmental’ aspect of the broader ESG grading system, these crude oil companies may still make the grade on the ‘S’ or ‘G’ aspects due to implementing socially mindful business or hiring practices and strong corporate governance principles.
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