Why Comparability is a Greater Problem Than Greenwashing in ESG ETFs

13(2) William & Mary Business Law Review 441 (2022)

47 Pages Posted: 2 Sep 2021 Last revised: 22 Apr 2022

See all articles by Ryan Clements

Ryan Clements

University of Calgary Faculty of Law

Date Written: August 10, 2021

Abstract

This article argues that comparability in environmental, social, and governance (ESG) exchange traded funds (ETFs) is a much greater problem than greenwashing. Rising demand for sustainable investment products in recent years has been met with an explosion in ESG ETF varieties, and numerous ESG-themed funds have captured massive capital inflows. There is little evidence, however, that deceptive “greenwashing” is widespread in ETFs. ETF issuers face significant reputational costs from such behavior, and there are effectively no consumer switching costs for hyper-liquid, easily accessible ETFs. While non-deceptive practices of asset-managers are observable in the zero-sum, highly competitive, asset management game of capturing new ESG-directed capital flows, the subjectivity that ETF issuers use to integrate ESG considerations into the composition of underlying ETF holdings is so disparate that investors face tremendous information acquisition and synthesis costs, and difficulty comparing products. This dilemma grows as product choice expands. ESG ETFs also create unique issuer and commercial index provider conflicts. An investor focused regulatory framework for ESG ETFs would aid comparability, standardization, and consistent product marketing presentation. To this end, this article builds on the author’s prior work on comparative complexity in ETFs by advancing three immediate measures to improve comparability and facilitate more efficient capital allocation in ESG ETF varieties: first, require justification of a fund’s usage of ESG terminology in its name through specific ETF disclosures; second, standardize ESG measurement metrics; and third, mandate uniform information presentation layouts on ETF issuer websites.

Keywords: sec, securities, investment funds, greenwashing, governance, social, environmental, esg, exchange traded fund, etf

JEL Classification: K22, K29, G01, G02, G14, G20, G23, O16

Suggested Citation

Clements, Ryan, Why Comparability is a Greater Problem Than Greenwashing in ESG ETFs (August 10, 2021). 13(2) William & Mary Business Law Review 441 (2022), Available at SSRN: https://ssrn.com/abstract=3902820

Ryan Clements (Contact Author)

University of Calgary Faculty of Law ( email )

Murray Fraser Hall
2500 University Dr. N.W.
Calgary, Alberta T2N 1N4
Canada
4036191173 (Phone)

HOME PAGE: http://https://law.ucalgary.ca/profiles/clements

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