How ESG Innovation and ESG Regulation Can Work Together to Fight Greenwashing and Achieve ESG Goals

by Guillaume Detrait, President & Chief Risk Officer
[email protected]

For more than 2 years, Welton has been engaged in the process of preparing our ESG Advantage strategy to comply with the global regulatory and reporting frameworks including SFDR and UNPRI, two of the most advanced frameworks that are shaping the sustainability agenda in the investment space. Now that we are close to the end of this process, I wanted to share some thoughts on why we have been so committed to this endeavor.

It is our view that the regulation of ESG strategies to prevent greenwashing – a term that broadly refers to the marketing of ESG investment products that are ESG in name only and do not, in fact, create better ESG outcomes – is critical to the continued adoption of ESG strategies by institutional investors and to further ESG innovation.

First a bit of background. We launched ESG Advantage in June of 2020, and from the beginning we have worked hard to situate ourselves in an authentic way across the ESG landscape. Philosophically, we strongly believe that living our values as an investment firm is an important part of a commitment to a more sustainable world. For this reason, we developed and adopted a firm-wide ESG framework a few years ago. This is a dynamic framework that consider the resources the company takes in and the waste it discharges (the “E”); the relationships the company has and the reputation it fosters (the “S”) and our internal system of practices, controls, and procedures (the “G”).

From a more practical standpoint, we are equally committed to the idea that ESG Advantage meets established regulatory standards that are designed to prevent greenwashing. This was particularly important with respect to ESG Advantage as it is a thoroughly innovative and unique product in the investment landscape. Virtually all ESG strategies targeting institutional investors are for public equities. But ESG Advantage is a multi-asset strategy that integrates non-correlated return drivers into a core portfolio of actively managed ESG-screened equities, for risk mitigation, and downside performance advantages purposes. So, it was very important to us that the strategy is compliant with established regulatory bodies.

We have therefore engaged the sustainability practice of one of the big 4 audit firms to help us identify areas of improvement to meet the reporting and disclosure requirement. This resulted in our reinforcing our sustainability beliefs and objectives; developing a responsible investing and stewardship policy; measuring ESG KPIs; and strengthening oversight and governance.

Why are ESG standards of particular importance to Welton?

As the field of ESG investing continues to grow and investment options proliferate, the phenomenon known as greenwashing has multiplied. For asset managers like Welton who are committed philosophically and practically to investment solutions that can deliver compelling financial returns as well as meaningful impact outcomes, greenwashing has become a widely documented scourge on the industry.

Simply put, greenwashing undercuts the legitimacy of ESG investment. What’s more, the only way to promote further innovation in the field of ESG investing is to ensure regulatory compliance. The two go hand in hand. For investors to be able to trust that an ESG strategy is furthering sustainability objectives, we need a common language based on readily available tools like SFDR and UN PRI so that investors can make informed decisions about the various solutions available in the marketplace and weigh the options against one another.

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