What Can Asset Managers Do to Mitigate Greenwashing Risks?

As sustainable investing gains traction, asset managers are under pressure to incorporate environmental, social, and governance (ESG) factors into their investment strategies. While this shift signals progress toward more responsible capital allocation, it also introduces the risk of greenwashing—the practice of overstating or misrepresenting the sustainability of investments.

For asset managers, greenwashing is not just a marketing misstep. It can lead to regulatory penalties, reputational damage, and a loss of investor trust. In this blog, we explore why greenwashing occurs, what risks it poses, and how asset managers can actively mitigate these challenges.

Greenwashing in asset management often stems from ESG-related claims that lack sufficient evidence or transparency. This can occur due to:

• Ambiguous definitions of sustainability
• Over-reliance on third-party ESG assessments
• Lack of standardized disclosure frameworks

For example, a fund may be marketed as ‘climate-conscious’ while holding stocks of companies with poor ESG records. This disconnect may result from internal knowledge gaps, misaligned marketing pressures, or superficial ESG integration.

As regulatory scrutiny increases, asset managers must first understand the root causes of greenwashing to tackle it effectively.

Read more- How Is Greenwashing Being Combatting Greenwashing Through Regulations?

Authorities such as the U.S. SEC, EU SFDR, and UK FCA are tightening disclosure requirements for ESG-labeled products. Inaccurate or misleading claims can trigger investigations, fines, or the delisting of funds.

Mislabeling ESG credentials can erode investor trust and damage a firm’s brand. Authenticity is non-negotiable for investors seeking sustainable returns.

Asset managers may face litigation if ESG claims are found to be deceptive or unfounded, especially in jurisdictions with stronger investor protection laws.

A pattern of greenwashing signals weak ESG integration across the investment process. This can lead to poorly constructed portfolios that fail to achieve satisfactory financial and sustainable performance.

Recognizing these risks is the first step toward building more credible and resilient ESG strategies.

Read more: ESG Risk Ratings vs ESG Impact Ratings

ESG investing cannot rely solely on labels or scores. Asset managers must:

• Focus on material, industry-specific ESG issues
• Conduct thorough through ESG research
• Understand the importance of independent ESG ratings

Robust due diligence ensures that investment decisions reflect true sustainability performance—not just surface-level branding.

Clear and consistent reporting is essential. Managers should align their ESG disclosures with globally recognized frameworks such as:

• Global Reporting Initiative (GRI)
• Sustainability Accounting Standards Board (SASB)
• Task Force on Climate-related Financial Disclosures (TCFD)

Transparent methodologies and well-defined sustainability criteria help prevent misinterpretation and establish realistic investor expectations.

Read more: Climate Reporting of Long-Short Investment Portfolios and Derivatives

Greenwashing mitigation is not limited to security selection. Active ownership is equally critical:

• Engage with portfolio companies on material ESG issues
• Vote on ESG-related shareholder resolutions
• Collaborate with other investors to drive long-term ESG improvements

This signals a commitment to actual ESG progress rather than passive compliance.

Often, greenwashing is the result of inconsistent knowledge across teams. Training investment, sales, and marketing teams on ESG principles ensures informed decision-making.

Establishing ESG governance structures—such as sustainability committees or external ESG advisory boards—can further embed accountability across the organization.

Asset managers should stay vigilant against these three common signs of greenwashing:

• Vagueness: Using terms such as ‘green’ or ‘eco-friendly’ without explanation
• Hidden trade-offs: Highlighting positive metrics while ignoring negative impacts
• Lack of verification: Making claims without backing them with data

Thoroughly reviewing marketing materials, fund documentation, and public disclosures is critical to avoid these red flags.

Global regulators are stepping up efforts to standardize ESG claims and reduce greenwashing:

• The EU SFDR mandates detailed ESG disclosures and fund classification.
• The U.S. SEC is introducing rules requiring clarity on how ESG factors influence fund strategies.
• The UK FCA is developing a Sustainability Disclosure Requirement (SDR) to tighten fund labeling standards.

Asset managers must stay ahead of these developments by aligning their ESG policies and controls with regulatory expectations. Doing so not only avoids compliance risks but also strengthens investor confidence.

Read more: ‘Investors’ Guide to Spotting Greenwashing

Tackling greenwashing is more than a compliance exercise—it’s about building authenticity, trust, and long-term value in sustainable investing.

Asset managers have a unique opportunity to lead by applying rigorous ESG due diligence, improving transparency, training their teams, and actively engaging with portfolio companies. These efforts not only safeguard reputations but also contribute to a more credible and effective ESG investment ecosystem.