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Investments and Greenwashing: avoiding pitfalls to make an impact

Clim8 Team

23 April 2021 Investment AcademySustainabilitySustainable Investing

greenwashing

What is greenwashing?

When a company promotes unsubstantial and misleading green claims about its products or services, it can be called greenwashing.

Often used as a smoke and mirrors ploy, greenwashing distracts customers from the reality of a company’s operations and outputs. Fossil fuel companies are infamous for it. For example, they spend vast media budgets on promoting their latest green technology innovations, which only accounts for 4% of revenues. All the while, pumping billions of pounds worth into new oil research [1]. 

In the investment industry, greenwashing refers to money managers who claim to offer ‘sustainable’, ‘green’ or even ‘responsible’ portfolios without in our view transparent and conclusive evidence of their impact. 

Currently, according to research conducted by The 2 Degrees Investment Initiative 85% of so-called green-themed funds (a specific niche of the wider overall market) all ‘green funds’ have misleading marketing [2].

Paved with good intentions: what drives greenwashing?

Greenwashing, in our view, leverages customers’ good intentions for cynical ends. In the belief they are investing their money to  benefit the planet, on top of growing their nest egg, customers may ultimately be harming it further. 

Even when they implement better investment standards in good faith, investment firms can find themselves greenwashing. A lack of understanding of impact investing, or the desire to appear further along on that journey than is truly the case can drive companies into a greenwashing quagmire. 

Marketing departments must be fully in sync with the investment team, so that a clear and transparent roadmap can be implemented.

How is greenwashing hurting the investment industry?

Greenwashing in our opinion is detrimental to the entire investment and asset management industry regardless of whether individual companies are doing it or not. Younger generations are generally savvier and more demanding. They tend to actively seek out additional information on companies to see whether what is being advertised is backed up with hard evidence. A whiff of greenwashing could damage customers’ trust in the entire sector.

Why greenwash?

In the last few years, customers have become more eco-conscious, leading to a mass inflow of money to ‘greener’ funds. The ‘green’ investing sector hit $1 trillion in 2020 [3]. Many firms realised that their existing portfolios could not benefit from this trend, not having the necessary green credentials to take on their competitors. 

A wave of passive ‘ESG / green’ funds subsequently appeared in the market (see glossary for ‘passive fund’ definition) from companies wanting a foot in the door of this rapidly growing sector. However, due to a lack of regulation and active decision-making in passive funds, despite their ‘green’ claims, a number actually allocated funds where they shouldn’t have. As an example, one third of ‘low-carbon funds’ in the UK are currently invested in oil and gas stocks [4].

Unfortunately until effective regulation is fully implemented, it seems to us greenwashing is here to stay.

Coining greenwashing

The term ‘greenwashing’ was first coined by an American researcher and environmentalist, Jay Westerveld in 1986. Visiting a resort in Samoa, Westerveld noticed they were promoting a new ‘reusable towel service’ which was ‘better for the environment’ yet several hundred metres away, they were cutting down thousands of trees for their latest expansion. The messaging was incoherent. Westerveld defined the term ‘greenwashing’ in an essay he wrote based on the irony of the ‘save the towel’ movement in the hospitality industry [5].

What regulations or laws are in place to prevent greenwashing?

A regulation came into force on 12 July 2020 though most of the provisions will not apply until 2022 and 2023 (since Brexit, we now have no clear information on how and if the UK will enforce any regulations). However, Her Majesty’s Treasury has stated that the sustainability and responsible investing agenda is and has been a focus of its Asset Management Taskforce. Further, the UK government has committed to reach net zero by 2050 and is currently conducting a review on how best to fund the transition to net zero1.

However, the EU Taxonomy Regulation (see glossary for full definition) is currently being further established; a set of recommended criteria that will help investors determine whether funds are ‘sustainable’. However despite the recently approved recommendations put forward to the European Commission, official roll out on transparency will not take place until 2022. 

In the meantime, we would encourage firms with ESG offerings to carefully consider the requirement to be fair, clear and not misleading in their communications. This includes in setting out information about their investment process and investment decision-making so that it is clear to consumers what they are investing in and to help to ensure the industry provides consistent messages to the communities we serve 

Do penalties exist?

Not explicitly. Though, in our view, it can surely  only be a matter of time before greenwashing becomes history. And if regulations don’t lead the way, our view is savvy consumers will. Damage to a brand’s reputation can potentially be irreversible, especially in the financial services industry, where customers trust firms with their savings.

How to spot greenwashing in the investment industry?

Until additional regulation kicks in, customers have a responsibility to put their investigative hats on. In our opinion, here is how:

  • Enquire about the firm’s expertiseIt is key to assess the experience of the fund management team and their sustainable investing credentials. How do they stay abreast of all the latest climate change news? Regular training should be in place to ensure the investment team is staying on top of trends. If those answers are difficult to come by or unconvincing, this should be a red flag. 
  • Transparency is key – The investment firm may well be investing in sustainable initiatives but are they themselves sustainable as institutions? They should have net zero carbon plans (see glossary for definition) in place as well as a Diversity & Inclusion policy which should be implemented via a diverse team across the whole organisation. Energy efficiency certificates can be verified on certifiers’ websites. Beyond companies having plans, customers should also ask for evidence that those companies  are acting on these plans backed up by real evidence. You have to walk the walk as well as talk the talk. 
  • Demand information on how they embed ESG – The term ESG (see glossary for definition) is endemic. However, the current lack of full regulation makes it easy for investment firms to claim their funds are ESG-aligned. Therefore, customers should challenge the investment manager on their strategy to embed ESG in the investment process. While the following may be highly regarded systems that can be leveraged to enhance better decision making – Global Reporting Initiative, Sustainability Accounting Standards Board and the World Benchmarking Alliance, if it emerges that ESG filtering is more an add-on than core to the strategy, then more digging in our view is required. 
  • Question the fund’s investment strategy and process approachFrameworks and methodologies should be clearly  aligned with their sustainability goals. Do they disclose their underlying investments and how those are tackling sustainability issues?  Impact reports on how beneficial their investments have been for our planet in our view should be published annually and backed by solid evidence. Transparency in our opinion has to be key. 
  • It is all in the wording –  Be wary of websites flush with vague wording such as ‘we believe sustainability should be at the core of everything we do’ without hard evidence to back up such statements. Generic fund names e.g. ‘Sustainable ISA’ can also be misleading. Look for hard evidence as well as how such firms have defined sustainable investing.
  • Seek out engagement levels – Management teams should lead the way and hold their investment companies to account, constantly looking to improve their practices. What is their voting policy? Engagement is paramount in the transition to a greener economy. 

Until regulations come fully into play, make sure you keep your wits about you. We expect more transparency and regulation to drip through in 2021, which should be helpful, at least in raising awareness.

You can track the European Taxonomy regulation progress via the European Commission website

With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice. Past performance is not a reliable indicator of future results.

Notes

1John Glen addresses Investment Association on Sustainability and Responsible Investment – GOV.UK (www.gov.uk)

Sources

[1] Independent

[2] Reuters

[3] The Motley Fool

[4] The Financial Times

[5] The Guardian

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