How to tackle greenwashing

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Supported by
Royal London
How to tackle greenwashing
Martin Meissner; The Associated Press.

Responsible investing is now more popular than ever, but with it comes another phenomenon known as greenwashing, where funds and businesses market products and investments to make them appear more sustainable and ethical than they really are. 

With more investors interested in climate and social impact-related issues, many advisers have growing concerns around greenwashing, leaving many feeling confused or sceptical about the world of 'green' investing. 

Advising clients to invest in products that are later accused of greenwashing is one of the biggest concerns for financial advisers when it comes to environmental, social and governance investing, according to research by Boring Money.

Around 69 per cent of advisers surveyed say they were worried about the reputational risk of recommending products whose sustainability credentials are later called into question.

But what exactly is greenwashing and how big of a threat is it?

The universal theme for many in the field is that greenwashing can be intentional or unintentional, but more often the former, which deliberately misleads people into viewing products as being more green or environmentally friendly than they actually are. 

Julia Dreblow, director at SRI Services, says greenwashing is a major problem that undermines client trust and risks misallocating capital as investment that should be directed towards companies that are really leading the shift to net zero. 

“I am of the view that greenwashing is not as straightforward as people often think. In the investment industry it comes in two main forms: intentional and unintentional.  

"It is widespread as it is borne of an industry-wide lack of real understanding of environmental and social issues, threats and opportunities.”

She explains that this has been allowed to evolve because for many decades investment professionals have been told these areas are non-financial and therefore irrelevant.

“The other challenge is that maintaining the status quo has benefited many investors and investment institutions and therefore incentivised greenwashing.  

"We are now at a point in time where if we do not act swiftly and use markets to drive the shift to net zero and end the destruction of habitat the costs will be unimaginably high, which is why swift action is now the only option.”

This view of greenwashing as one of the biggest threats in the industry was one shared by many.

The depth of this concern is regularly reflected by the market itself, with a survey conducted by Quilter earlier this year finding that greenwashing was the primary concern for 44 per cent of investors. 

Sarah Gordon, chief executive of the Impact Investing Institute, says: “The effect of greenwashing is not just limited to those within the investment market. Identified instances of greenwashing can have a significant impact on the external perception of impact investing and lead to questions about its efficacy as a whole.”

However, as many studies have found, there is an ever-increasing awareness and understanding of the impacts of climate change among investors and growing demand for greener financial products and services.

Sushil Kuner, principal associate, financial services regulation at Gowling WLG, explains these are great opportunities for the financial services sector to accelerate the transition to a net-zero emissions economy.  

She says: “Climate-related risks also have the potential to have a material impact on financial markets and the introduction of mandatory climate-related financial disclosures would help investors, lenders and insurance underwriters to appropriately assess and price climate-related risks, creating a more stable and resilient sector. 

“Greenwashing therefore seriously jeopardises not only the transition to a net-zero carbon economy but also the resilience of the financial markets. In particular, greenwashing can seriously damage investor confidence and erode trust and can create an image that the state of play is better than it actually is, thereby potentially slowing down any innovation and investment necessary in the fight against climate change.”

Determining ‘true’ credentials

While the issue of greenwashing remains and creates concerns around how green a fund really is, some experts have argued that advisers are still able to determine a fund’s true credibility.

Hortense Bioy, director of sustainability research at Morningstar, says: “Greenwashing is generally seen as intentional, occurring when asset managers over-claim and over-sell what they are actually providing.”

She explains such practices are problematic and corrosive to long-term trust and credibility and also pose problems for the planet if money does not flow into activities that help solve environmental issues like climate change, or social issues.

However, Bioy says that it is possible to determine a fund's true green credentials if the fund reports sustainability metrics. 

“Disclosure isn’t standard across the fund industry yet, but starting from next year, with SFDR’s level 2 of disclosure, it should become easier for advisers to assess and compare funds’ green credentials,” she says. 

“There is a spectrum of green strategies, from light to dark green, with different risk-return profiles. These strategies will play different roles in an investor’s portfolios. Investors should bear in mind that darker green funds, such as clean energy funds, often result in narrow and concentrated portfolios, which makes them more suitable as satellite holdings than as core parts of a portfolio.”

Likewise, Kuner says there will be funds that are greener than others, meaning that the underlying investments are more sustainable and, for example, have better metrics on carbon emissions.

She explains that financial advisers should take care to ensure that any comparisons are meaningful, based on underlying assumptions and proxy data, which fund managers are permitted to use in their green calculations and methodologies.

“Even if a fund is less green than another, they still may well be suitable for responsible investing taking into account the investor's overall objectives and risk appetite, which will include performance and potential returns,” she adds.

“As long as there is no greenwashing in play and the fund's ESG/sustainability claims are not misleading, different tiers of green funds can indeed be suitable for responsible investing and meet different investors' needs.”

However, Gavin Francis, founder and director at Worthstone, says all investments have an impact that could be positive or negative and it is important to look beyond that.

“Whereas with ESG investing you’re aiming to limit harm, with impact investing you’re proactively placing capital where it can have a positive impact,” he explains. “You need to look beyond sustainability or how green a fund is and look more holistically. 

“What about the social impact? We’d always recommend looking beyond ESG screening, which only offers one lens for assessing an investment.”

No ‘one size fits all’

Although standardisation has not yet been reached, there are still many metrics advisers can employ to determine the true extent of a fund’s green credentials.

An important part of this, according to Gordon of the Impact Investing Institute, is taking a wide view and assessing the social as well as the environmental impact and studying each part of the supply chain to ensure any benefits are not overshadowed by negative impacts found elsewhere. 

She explains that one way to do this is to ensure impact objectives – often expressed through a statement of corporate purpose – are tied to clear metrics and key performance indicators, which assess both their social and environmental impacts.

“Rigorous research will always be the best tool to combat greenwashing, with advisers needing to find the right data points and ratings to meet the requirements of their end investors,” she says. "Communication is also vital between all parties.”

SRI Services' Dreblow agrees, saying advisers need to do some homework if they are to avoid greenwashing or "matching clients to inappropriate fund options". 

She says: “It may be that they consult tools such as Fund EcoMarket or that they do their own research, but if an intermediary wants to ensure investment options match client aims, they need to roll their sleeves up a little. 

“In order to address the deeper issues that sit behind the challenges advisers face in this area, I’d encourage intermediaries to read around the topic; books such as Doughnut Economics by Kate Raworth and David Attenborough’s A Life on Our Planet are great places to start.”

Likewise, Bioy says that to avoid greenwashing due diligence is key, and argues that advisers cannot rely on a label or a name as it is important to understand that sustainable funds vary in their approach. 

“The wide range of options out there reflects the demand for different types of products with different level of greenness,” she says. "There is no one-size-fits-all.”

Sonia Rach is a senior reporter at FTAdviser