21 Apr How to Avoid Greenwashing? —Greenwashing in Finance
“Invest in our planet” is the 2022 Earth Day theme. While sustainable environmental, social, and governance (ESG) funds and investment products have rapidly grown in popularity, there has been a sharp increase in greenwashing, or making marketing information appear more environmentally friendly. Financial advisors must be careful to avoid this trap since it can cost them their hard-earned investors’ trust. Here are some tips.
Earth Day has been celebrated yearly on April 22 since 1970. This year is dedicated to driving environmental change by focusing on business and political climates to propel transformative change for people and our planet. It calls on everyone—businesses, governments, and citizens—to be accounted for, and for everyone to be accountable.
The majority of investors took notice by integrating environmental, social, and governance aspects directly into their investment policies. As a result, sustainable ESG funds have rapidly grown in popularity and have finally debunked the long-held belief that returns must be sacrificed to invest ethically or sustainably. In fact, research tells us quite the contrary — investing ethically or sustainably enhances returns.
Despite the increasing awareness around sustainable, responsible, and ethical finance, the sector has come under scrutiny of late. More and more investors are concerned by the possibility of greenwashing.
What is greenwashing?
The definition of greenwashing is complex. Many businesses and enterprises give an increasing importance to sustainability and adopting practices that will reduce their operation’s environmental impacts. However, some invest more effort on marketing their products or brand name as green instead of actual changes. By concentrating their efforts on changing customer perceptions instead of putting resources into becoming sustainable, these companies are greenwashing.
This unfortunately all too common practice is a deceptive tactic that uses green public relations to persuade the public that a business’s products, actions, and policies are environmentally friendly.
The cost of greenwashing in finance
While greenwashing is nothing new, it has increased sharply in recent years along with consumer demand for all things environmentally friendly. Indeed, greenwashing is a growing problem. Research from Quilter, a UK leading wealth management company, reports that 44% of investors today admit greenwashing is their biggest concern when it comes to ESG investing.
Loss of Trust Towards Advisors
Unsurprisingly, one of the most important consequences associated with greenwashing is the irreparable damage that can be done to a client’s trust towards their advisor. Financial advisors spend years developing good relations with their clients and a good reputation in the industry. Recommending companies that greenwash can hurt their efforts significantly and often leads to the ultimate consequence: losing their business.
Greenwashing initiatives can lead to businesses being added to sustainable funds despite their very nature, such as oil and gas companies or businesses simply trying to capitalize on the sustainability trend.
Investor money siphoned away by greenwashing efforts
There is an impact both on the environment and on the investors, but there is also an impact on respectful, truly eco-friendly businesses. Because they compete against large corporations that invest into greenwashing marketing, these businesses actively changing their operations and adopting sustainable practices see their shares being siphoned away.
How does investment management solutions help ESG investors?
It is an undeniable fact that FinTech has completely transformed the wealth management industry. This includes streamlining the ESG investing and analysis process for advisors. Indeed, new and innovative FinTech software, tools, and services allow financial advisors and money managers to navigate the complexity of ESG investing to precisely measure the sustainability and societal impact of investing in a given fund or investment product.
ESG investment management solutions can help advisors pinpoint the best ESG opportunities for their clients and optimize their investment returns whether for shareholders; to help advisors better manage ESG investments; or to help clients navigate the complexity of ESG investing.
ESG management solutions today also provide data that allows wealth advisors to incorporate a range of ESG factors into the investment workflow, including portfolio analysis, equity research, screening, and quantitative analysis. This enables wealth managers to screen a large percentage of the total global market against predetermined ESG metrics on a client-by-client basis and thus develop an investment strategy that best caters to their clients’ needs, sustainability priorities, and long-term investment goals.
Tips to avoid greenwashing
Last week, the Canadian Investment Funds Standards Committee released a second draft of its Responsible Investment Identification Framework for mutual funds, ETFs, segregated funds, and pooled funds.
The purpose of this document is to develop a pragmatic identification standard to guide Canadian investors and their advisors and to help investors and fund manufacturers align on common language and definitions. The framework addresses six issues about ESG: integration and evaluation, thematic investing, exclusions, impact investing, engagement and stewardship activities, and best in class.
Furthermore, an International Sustainability Standards Board was recently created that should help regulate ESG investing in the future. However, for the time being, there is much work to be done before we can expect complete transparency in ESG funds and investment products.
Though globally accepted standards for ESG metrics may still be a while away, there are ways to avoid greenwashing without compromising your investors’ financial returns, and ultimately allowing you to maintain your client base.
Investment advisors have the tools to help sustainable investors
Investment advisors and financial planners must help their clients wade through a product’s brochure and prospectus. They must also walk them through the exact approach a fund or investment product is taking to ensure sustainability, such as reducing its carbon emissions, so that the client can assess whether or not it lines up with their ESG aspirations. This can be an extremely time-consuming task.
Fortunately, portfolio management firms and individuals have a range of functionalities at their disposal. They can speed up the process by providing direct access to ESG data, scores, and market research on individual funds and the companies they invest in. Investors can quickly assess the true sustainability of a fund and its performance to date, so that they can make informed investment decisions.
Learn more about greenwashing in finance
What are ESG funds?
ESG stands for Ecological, Social and Governance and is a holistic approach to investing. ESG funds are stocks or bonds portfolios in which factors like environmental, social and governance issues have been considered. They are integrated into the selection process of companies or governments that will be added to the funds. These companies and governments have passed rigorous tests to determine their impact on ESG criteria.
What are examples of greenwashing?
An organization can be greenwashing in many different ways, such as
- An organization claims that it is “green conscious,” but in fact, the organization does not have any concrete green initiatives to reduce factors such as carbon emissions;
- A business invests more advertising dollars on their environmentally friendly brands than they spend on positive green practices or sustainability programs;
- A company reduces its waste production during the manufacturing, but does not produce sustainable products, ending up creating more waste;
Many large companies have been accused of greenwashing in recent years and both their finances and reputation suffered significantly. The giant car manufacturer Volkswagen was caught greenwashing in a scandal appropriately called “Dieselgate.” The German manufacturer made a false claim regarding their diesel cars, saying they emitted fewer emissions than other models and subsequently selling over 11 million models. The reality was that software installed in the cars reacted to emission tests to manipulate the readings. It resulted in a massive hit to the reputation and investor trust of the company.
Another greenwashing attempt was with the oil multinational BP. Originally British Petroleum when it changed its name to Beyond Petroleum and installed solar panels to power their gas pumps. Marketing these changes misled some investors into believing the oil company was actively trying to solve our current environmental problem.
How to avoid greenwashing companies?
To avoid greenwashing, companies can pursue environmental sustainability certification via independent verification of their claimed environmental impacts. However, this is expensive, and the process must be repeated every few years. This makes checking on the individual companies in which a fund is investing particularly tricky for investment advisors.
What makes greenwashing possible in the financial industry?
Currently, ESG reporting is not a regulatory requirement, but corporate companies are starting to use sustainability and social responsibility information to provide investors with a more detailed perspective about their operations. More companies are issuing sustainability and social responsibility reports, which also provide data and metrics.
However, ineffective external monitoring and verification on the part of regulatory agencies is a key contributor to the rise of greenwashing. Another issue faced by investment advisors is a lack of standardization: there are many different ESG data providers providing different ESG evaluations. This diversity, and the relatively new rise of sustainability, makes it difficult to know which data sources are reliable, allowing businesses to slip through the net and be added to funds.
How to recognize greenwashing marketing strategies?
Many companies are expert greenwashers, and over the years, more than one form of greenwashing has been used. Here are common greenwashing tactics used by organizations:
Disclosing strategic information about products:
Sometimes companies may not mention that the products they manufacture may have negative effects on the environment. A great example is electric vehicles (EVs), praised to be eco-friendly by their manufacturers because they don’t use fossil fuels even if the carbon emissions caused by the production of lithium batteries are extremely damaging. Consumers are rarely aware of the issues related to batteries.
Using symbolic initiatives to give a company a green image:
Many brands draw attention to a minor positive action that does little to change their overall environmental footprint and promote it as their sustainability efforts. It is often tainted in irony, as an organization’s green initiative tries to help situations directly caused by their own operations. A perfect example is an oil company donating soap to clean animals caught in an oil spill.
Using broad and vague statements in their marketing:
Greenwashing has to do with deception. In this case, a company can use vague language to make an environmental claim that can’t be verified and removes their responsibility, such as “we’re using new and improved materials.”
Presenting irrelevant information about products:
Companies can greenwash products by making a green claim that is irrelevant and has little environmental impact. They are statements that, without being false claims, give consumers the impression they are buying eco-friendly products. An example would be aerosol sprays branded as green products because they are CFC-free, while CFC has been illegal for decades.
Leveraging Data
This communication strategy is very commonly found and consists in presenting overinflated data that reflects positively on a business. A great example would be a packaging manufacturer increasing the proportion of recycled content from 4% to 6% in order to claim their packaging products now use 50% more recycled material. One could claim the positive impact and sustainability efforts are not fairly represented.