BlackRock, State Street scramble to manage greenwashing risk

afr.com:

Global asset managers including BlackRock and State Street are scrambling to understand whether they could be hit with greenwashing lawsuits after the action brought against Vanguard because they rely on similar global indices to structure ESG investment options.

The Financial Services Council held an urgent phone hookup with members this week to discuss their vulnerability to prosecution for misleading and deceptive conduct, similar to that brought against a Vanguard bond ETF by the Australian Securities and Investments Commission.

ASIC is suing Vanguard for allegedly misleading investors in its $1 billion-plus ethical bond product about the sustainability of the underlying assets.

Vanguard mirrored the holdings of the Bloomberg Barclays MSCI Global Aggregate SRI [socially responsible investing] Exclusions Float Adjusted Index, which the ETF tracks, but promised to screen out bond issuers with ties to thermal coal, oil and gas.

ASIC found investments linked to Chevron, oil pipelines in the US and Middle East, and a petroleum company in Chile in the fund, prompting allegations that Vanguard’s own screening, or its understanding of the index provider’s, fell short.

The case has sparked alarm among fund managers and super funds, which have relied on the ESG screens adopted by global indices as a cheap way to quickly tap into booming demand for ethical or sustainable products.

The watchdog warned that it was turning its focus to deficient screening processes and had multiple investigations afoot.

Most ESG investment offerings in Australia use the same indices, and some funds go further by adding their own screens.

FSC chief executive Blake Briggs said the industry group’s members were working out how to respond to ASIC’s