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Regulators around the world are attempting to tackle greenwashing in the asset management business with sets of rules and guidance designed to ensure that investors are getting what’s promised from ESG funds — efforts that are increasing compliance cost and regulatory risk in the sector, Fitch Ratings says.

In a new report, the rating agency examined regulators’ latest attempts to combat greenwashing in the fund industry. While these initiatives take different approaches, they share a couple of basic goals — establishing a fund labelling or classification system, and developing disclosure requirements to reveal how ESG factors affect the investment process.

Fitch said that it views enhanced regulatory oversight and improved transparency in this area as supportive of fund firms’ existing ratings, but it doesn’t necessarily see these measures as a rating positive.

Among other things, it noted that new regulatory requirements introduce additional costs to the ESG fund management process.

Fitch said that asset managers “will face increased costs from fund-level ESG regulations, including one-off charges as well as higher reporting, legal and compliance costs, and data and staff training expenses.”

Additionally, asset managers that operate in multiple regions “face the added complexities of navigating different regulations given the lack of common ESG standards and sustainable investment definition globally.”

At the same time, Fitch said that heightened scrutiny in this area increases regulatory risk.

The financial and reputational impact of these risks on asset managers is “still unclear,” it said, given the limited enforcement activity in this area to date.

“Nevertheless, asset managers face regulatory compliance risks, which could create reputational damage and fund outflows in more extreme cases,” it noted.

That said, these factors aren’t expected to represent much of a deterrent to asset managers launching ESG products, as these funds have attracted a higher share of investor flows in the past few years, and often carry higher margins.

“We expect enhanced transparency and increased comparability resulting from these regulations, increasing flows into ESG-related funds from sustainability-conscious investors,” it said.