26 September 2023
An Exploration of Greenwashing Risks in Investment Fund Disclosures: An Investor Perspective
by Nicole Gehrig and Alex Moreno
Executive Summary
This paper analyzes investment funds’ disclosures related to environmental, social, and governance (ESG) information through the lens of investors to understand the nature of disclosure issues that could give rise to a perception of greenwashing. A perception of greenwashing can arise when investors struggle to understand the underlying sustainability characteristics of a fund, irrespective of the intent or veracity of the disclosures.
Comprehension of the sustainability characteristics of a fund is challenging when there are inconsistent disclosures, omissions of key information regarding the sustainability goals or strategy, unsubstantiated sustainability claims, or undue emphasis of certain features that could appear to exaggerate the actual sustainability characteristics of a fund.
To understand the nature of these disclosure issues, we analyze product disclosures for a sample of 60 investment funds that are marketed to retail investors and that incorporate ESG factors in the investment process. The sample includes 30 funds from the European Union and 30 funds from North America. Through our review of product disclosures, we identify what disclosure improvements are needed to improve investor comprehension and alleviate concerns about the perception of potential greenwashing. Positive actions by firms to address the issues raised can help mitigate investor concerns regarding potential greenwashing in the investment industry.
Greenwashing is a complicated, contextual, and nuanced issue, and the review of documentation alone might not evidence its existence. Therefore, investors should conduct thorough due diligence prior to any investment in order to provide more assurance that managers are following procedures and fairly representing the sustainability characteristics of their fund.
The mission of CFA Institute is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. As such, our aim is to help promote disclosure best practices for the sake of market integrity.
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