ESG Investing  

How can advisers insulate themselves and clients from greenwashing?

This article is part of
Guide to ESG and regulation

How can advisers insulate themselves and clients from greenwashing?
(CJ Dayrit/Unsplash)

Greenwashing is the risk that an investment may claim to have stronger green credentials than it actually does. 

But there is also the risk that the terminologies and names used by investments may confuse the client into thinking it is greener than it actually is. 

It continues to be a key concern for regulators, governments and industry. For a company, risks emerge in a variety of categories such as strategic, legal, compliance, reputational and even financial. 

In 2019, the 2 degrees investing initiative (2DII), a think tank that co-ordinates some of the world’s largest research projects on sustainable finance, revealed that 85 per cent of funds labelled green had misleading marketing. 

That number will likely have reduced now due to the regulatory focus and product manufacturers improving the standards of their disclosures, but we are still seeing the headlines and greenwashing in action. 

 

 

 

 

 

The main risk with greenwashing is that investors end up with a portfolio that does not reflect their ESG preferences, something which fund groups are unlikely to be deliberately engaged in.

Rather, it is the consequence of a lack of clearly agreed definitions on which investors can then base their expectations, combined with a desire for asset managers to 'greenify' their fund ranges.

Laith Khalaf, head of investment analysis at AJ Bell, says the result is that there is probably some market dysfunction which is reflective of the growing pains of a nascent industry, rather than a result of widespread misbehaviour by fund groups. 

He adds: “To avoid any accusation of greenwashing, advisers should seek to clearly communicate to customers how a given investment meets their ESG preferences, and indeed where it might not.”

Alix Lebec, chief executive and founder of Lebec Consulting, says at a time when the industry needs ESG to be taken seriously, there is a risk that greenwashing may put every ESG product out there into question. 

She adds: “The best way we can insulate is to question the data and go beyond it. ESG data is often self-reported by the companies so it is important to also take into consideration the analysis that follows the data. 

“And if there isn’t any, that could very well be a warning sign or a signal to analyse the data yourself and ensure it answers your key questions.”

Spotting greenwashing

Ryan Medlock, senior investment development and technical manager at Royal London, says: “All of us within the industry, and particularly the advice community, will need to pay very close attention to this. That means formally including responsible investment considerations within wider research and due diligence processes. 

“We know a fund’s name will not always reflect what it actually does from a responsible investment perspective and that’s why it’s important to lift the lid and reach your own conclusion.”