Responsible investing's future  

How to tackle greenwashing

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.