This is a comprehensive guide to the common environmental, social and governance (ESG) risks and pitfalls of greenwashing in sustainable investments. The report notes that over $35 trillion is invested in ESG funds, equivalent to one-third of AUM globally, and highlights that ambiguous definitions contribute to greenwashing.

Regulators, accounting bodies, investor coalitions, and environmental organisations have advocated for standards to impose a consensus on the definition of ESG, using emerging tools for disclosure. The report explains the risks to asset managers of making exaggerated ESG claims, with a lack of a consensus on the definition of ESG presenting financial institutions with liability risks.

Asset managers should consider adopting best practices, including:

• Establishing company-wide sustainability data policies and procedures;
• Using reliable third-party data providers to fill gaps;
• Using plain language practices in sustainability disclosures to prevent the spread of greenwashing claims;
• Promoting cohesion between ESG and investment teams to enable a comprehensive-looking investment thesis;
• Being proactive in informing intermediaries and end-investors of changes in strategies and objectives in sustainable funds; and
• Providing detailed fund documentation that clearly links fund names, objectives and strategies, and citing clear and comprehensive firm-wide policies.

Investors should pay close attention to the risks of greenwashing to ensure products chosen align with their objectives. The report urges asset managers and fund boards to establish firm-wide strategies for sustainable investing products and the related use of sustainability data from third parties.