In Focus: Sustainable investing  

ESG: Who is doing the washing?

ESG: Who is doing the washing?
Photo by Francesco Ungaro via Pexels

During the course of Good Money Week, I attended three sessions, and at each one the topic of greenwashing was on the agenda.

The director of ESG at the Financial Conduct Authority even covered it in his keynote speech at Good Money Week, and indeed the FCA has just issued its consultation on a package of measures to tackle greenwashing.

In a bid to clamp down on greenwashing, the FCA today (October 25) proposed measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used.

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The US SEC recently fined an asset manager for falsely implying that some of its funds had undergone so-called ESG quality reviews.

It seems clear that greenwashing is a big issue.

ut what exactly is it, why is it so important, and what can be done to combat it while we wait for the FCA's proposals, which they intend to publish by the end of the first half of 2023?

Greenwashing is not a new phenomenon. It was first identified in the 1960s, with the name arising in 1986 (in relation to an oil company - imagine that).

The FCA defines greenwashing as: 

  • "Marketing that portrays an organisation's products, activities or policies as producing positive environmental outcomes when this is not the case.
  • "Making claims that could confuse or mislead a client, and possibly their adviser, seem unwise given the recent history of mis-selling scandals, yet the phenomenon persists."

It seems fair to assume that a fund labelled 'ESG Climate Change' would be unlikely to hold oil majors in its Top 10, and I believe advisers and investors are likely to feel the same.

Whether or not this fits a strict definition of greenwash, this genuine example strikes me as likely to confuse anyone seeking sustainable investments.

This is not to suggest that funds that invest into fossil fuels (or armaments or tobacco to include other sustainability issues) are the problem; it is those that present a marketing face to the world through the name of the fund, that do not align with an informed view of the underlying holdings.

Wishy-washy statements

The phenomenon is not confined to fund names.

There are asset managers that state on their website that "the importance of ESG factors is core to our investment process, therefore our entire MPS offering is ESG-focused in line with our ESG policy."

Or: "We invest in companies that are not only current sustainability ‘leaders' but also companies that are looking to improve their ESG impact."

Yet, within their fund's holdings one finds tobacco manufacturers, a major global arms manufacturer, and fossil fuel companies.

However, the manager is not breaching their stated investment process, so is this greenwashing?

This brings me to the issue of meaningless statements attached to funds, such as "ESG is integral to everything that we do" or "We are aligned with a transition/positive/impact pathway".

Such statements tell you nothing informative about the funds' approach to ESG or environmentally sustainable investment.

Equally unhelpful are jargon-laden statements such as "our ESG strategy also includes an avoidance of controversial weapons".