The core problem with sustainable investment, in terms of disclosure frameworks and labeling systems, is definitional. Most managers employ their own scoring systems and assess the sustainability of a company — through its products, services and operations — idiosyncratically or via specialized data vendors. It is therefore challenging for groups to decide exactly how to label funds without clear direction as to what is considered sustainable under the rules. That may yet change. But, in the meantime, we should ask if the industry could do more to help achieve the aims of SFDR — to increase transparency and build a consistent ESG framework for investors — by other means.
One way could be for asset managers offering sustainable strategies to seek to be far more transparent. That could mean, at the portfolio level, managers disclosing all holdings in the funds they regard as sustainable. Prospective (and existing) investors could easily discover, at the click of a mouse, what stocks a fund holds, and decide whether or not they want to be exposed to those companies.
Of course, some may not agree that all a portfolio's holdings fit their personal definitions of sustainability. They would, however, know exactly what they would be buying. This may not completely eradicate greenwashing in the narrow sense (some asset managers could still attempt to make inflated claims), but it would make it far easier to detect, as investors would enjoy more complete portfolio information than they often do today. Greenwashing would, over time, wither away.
Needless to say, this approach would be challenging for the asset management industry, both technically and in terms of mindset, to adopt at scale. But it is not impossible going forward to see such a future utilizing existing infrastructure. For instance, some investment structures, such as exchange-traded funds, already provide a format that could form the basis of an evolved category of highly transparent, sustainable funds.