In this article we’ll help you understand what 'greenwashing' is and how to avoid it.
ESG (environmental, social and governance investing) is a term that’s recently entered many investors’ vocabulary, but there’s another phrase that we’re also increasingly hearing – ‘greenwashing’. Whereas ESG is widely seen as a positive development, greenwashing on the other hand most definitely isn’t. In this article we’ll help you understand what it is and how to avoid it.
Green is the new black
ESG is big – trillions of dollars big. That’s because consumers, businesses, organisations and governments have become increasingly focused on our impact on people and the planet. It’s forecast that by 2025 one-third of all the money invested globally will incorporate ESG. Of course, where there are huge sums of money, there will always be people looking for a slice of the action, and ESG is a very big pie.
That’s meant many businesses, funds and investment firms alike have recently switched their attention to investing responsibly. Nothing wrong with that you might say, and for the most part you’d be right. The problem is that not everyone is as genuinely committed to ESG as they make out to be, and that’s where greenwashing becomes an issue.
What is greenwashing?
Greenwashing is a play on the term ‘whitewashing’, where undesirable facts are covered up. While greenwashing can cover up or downplay the negative side of things, it may also involve exaggerating, misleading or even falsifying facts to present a positive image that doesn’t reflect reality. Greenwashing is so-called because it often relates to environmental issues, but it’s also the social and governance side of things that some are presenting as more favourable than they really are.
How can organisations get away with this you might ask? Well, they don’t always – such as McDonalds introducing paper straws that turned out to be non-recyclable or the Volkswagen ‘dieselgate’ emissions scandal. Unlike financial accounts and statements, however, which are usually a legal obligation and require third-party audits, many sustainability claims are not facts and figures required by law, nor do they usually need independent checking. This means they’re often taken at face value without much scrutiny.
The name game
It’s not just companies that can be guilty of greenwashing. Some investment managers have launched funds in recent years with words like ‘Sustainable’, ‘Ethical’ or ‘ESG’ in their name when actually there’s not as much consideration given to these themes as we’re made to believe. Some existing funds have also been rebranded by adding these labels to the fund name, (for example, XYZ Equity Fund becomes XYZ Sustainable Equity Fund) when really the way the fund invests hasn’t changed much.
This has become enough of an issue that the Financial Conduct Authority in the UK has now got involved. It says it’ll be more closely scrutinising funds’ sustainability claims and will take action against any it feels are misleading.
Some investment advisory firms are also getting in on the greenwashing act, by declaring their commitment to ESG. While many have genuinely put a lot of consideration and resources behind it, others have little to show apart from the ability to recommend ESG funds, which anyone can do.
So this begs the question; if companies and funds to invest in, and the firms recommending these investments, could all potentially be greenwashing, how do we know what claims are authentic and what’s not?
Leave it to an expert
To really understand whether a company is as sustainable, responsible or otherwise as it says it is, you have to know the business inside out. Unless you work for or with the company though that’s easier said than done. In fact it’s very difficult. That’s why we think it’s best left to fund managers who spend their entire working day researching companies, and often have dedicated people who solely assess companies’ ESG credentials.
How do you know which funds are the best at this though, and just as importantly, how do you know if a fund itself is greenwashing?
You can leave that to us. We have a range of portfolios dedicated to ESG – our Responsible Growth portfolios. We’ve researched and interviewed every fund management team that features in them, to make sure they’re walking-the-walk and not just talking-the-talk regarding ESG. Of course we’ve also blended a range of different funds styles to make sure the portfolios are well-diversified and have the potential to deliver strong long-term returns.
How do you know we’re not greenwashing though?
We’re signatories of the United Nations Principles of Responsible Investment (PRI) – the world’s largest network of investment firms committed to ESG. That means we’ve made a pledge to incorporate ESG into all our investment research and decision-making, aim to promote ESG across the industry and will disclose our ESG activities to the PRI. Greenwashing? Not us, nor the funds we invest in for our clients.
If you’d like to find out more about our Responsible Growth portfolios or anything else about ESG investing, please contact your Skybound Wealth advisor or your local Skybound Wealth office.
If you would like to find out more about ESG and our responsible growth portfolios click here!