Managed fund sector's approach to disclosure is 'immature', executive says
Paul Gregory executive director of response and enforcement at the Financial Markets Authority, has explained why greenwashing, or providing false or misleading claims about companies’ social and environmental programs, is a problem – especially for Kiwi investors.
Gregory (pictured above), in an FMA opinion piece said that for investors, who were increasingly looking for investments that aligned with their values, or which at least didn’t deliver an ethical shock, managed funds marketed as ethical or responsible were more attractive.
“Attractive rhetoric, though, isn’t enough,” Gregory said. “Providers using terms like ethical and responsible to describe their products must ensure there is cohesive substance in how they design such products, how they market and advertise them and, most important, how they manage them.”
“That’s because while we’re familiar with harm from unexpectedly poor returns, poor risk management, and poor value for money over an investment horizon, we can’t – because it is so personal and because persistent demand for such products is relatively new – fathom the harm to investors from finding out their investments have compromised their values for 10, 15, 20, or more years. That they have been contributing to harming people, animals, or the environment over decades.
“This is why greenwashing matters. Providing misleading or false claims about social or environmental benefits or impact goes to the heart of fair dealing, and the overall impression provided by marketing materials is critical here.”
The FMA executive said investors chose funds based on marketing and what they thought they knew about what the fund invests in, and how. They were also prepared to pay more and accept lower returns for a fund they believed fitted their values.
“If, in reality, the funds’ investments don’t line up with what they believe they are investing in, that is a misleading value proposition,” Gregory said.
Acknowledging that risk of harm was why, in 2020, the FMA released a guidance telling funds claiming green or sustainable credentials to provide sufficient detail to articulate and substantiate that story – and the detail must be high-quality, lucid, and easy to find.
Just over a year later, the authority looked at the take-up by managed funds of the guidance and concluded, after a review of disclosure documents, websites, and marketing and advertising, that the managed fund sector “had an immature approach to their disclosure”.
“Overall, it was vague, loose, and inconsistent,” Gregory said.
FMA also looked into how easy it is for investors wanting to invest according to their values, to make good decisions.
“We found this was complicated by the reason why most investors look in the first place: not from a cohesive, internal value system but by generalised unease or, very commonly, by finding out something about their current investment which surprises them – an ethical jump scare,” Gregory said.
“Many then set off to identify a better fit for their values, are quickly faced with extensive jargon and find it hard to meaningfully compare. Some rely on advice from friends and family. Lots take claims on trust.
“In the end, virtually all end up taking a ‘leap of faith’ that their choice is the right one. And then assume that their investment will continue to be managed consistent with their values, rarely checking back to see what may have changed and, critically, also don’t change product. The decision was hard – much harder than they thought – and they are done.”
And this is exactly why it matters that the industry approach to disclosure is immature: “it represents the ingredients of a potential, multi-decade ethical shock for many New Zealand investors,” Gregory said.
It was also why FMA expected high-quality disclosure to provide insight into – and examples of – how future investment choices would be made.
“Like value of all kinds, ethical value depreciates if static,” Gregory said. “Even if the fund manager cannot anticipate events such as Russia’s actions in the Ukraine, how might their investors expect them to deal with it? What principles will the fund use to select future investments as policy and societal mores change?”
Choosing and using financial products is hard – and introducing ethical or responsible or sustainable or impact concepts to it, makes it harder, he said.
“It must be easier for people to make informed choices, especially if – as it seems from the FMA research – they would prefer not to make another one,” Gregory said.
He also assured investors that even if they never looked for the underlying detail and took claims on trust, “the FMA will be looking”.
Since FMA’s 2022 review, a number of managed funds have improved their disclosure or attempted to explain how they invest according to ethical or sustainable claims.
“FMA is sharpening its focus in this area and there are broader policy and consumer tailwinds for claims to be articulate, accurate, and meaningful,” Gregory said.
“Mandatory climate-reporting standards are here; broader sustainability standards are in the wings. Consumer expectation is growing. Fund managers can add substance to support their claims and labels and disclose accordingly or stop using the claims and labels. Marketing without underlying substance won’t wash, green or otherwise.”
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