ESG Growing Pains Include Greenwashing

12/16/2021

Business

0 min read

The Extreme Growth of ESG Has Bumps that Include Greenwashing

Over the past decade, there’s been a great proliferation of investment strategies and funds that consider environmental, social, and governance (ESG) factors. Publicly traded companies are certainly aware of this. They know that if they fall within these categories, to make certain they’re recognized for it. After all, this recognition could enhance demand for their stock. The rewards are great. Growth of ESG funds from January through September 2021 was $577 billion, and this far exceeded the prior year’s rapid expansion to $355 billion. And this does not include the investments in individual stocks outside of funds. There is no question, if a company is listed as ESG, it may get more attention than if it is not.

Greenwashing

As ESG continues to dominate the headlines, so does “greenwashing”, which occurs when an organization makes exaggerated claims that a product or service is more environmentally friendly than it truly is. Greenwashing can occur within a company selling a product or service. A classic example is when Volkswagen rigged its cars to cheat on emissions tests, then sold the cars as if they were in line with federal emissions standards while touting the benefits of “clean diesel”. Another example of greenwashing would be if an asset manager labeled an investment product, such as a mutual fund, as green or sustainable but had no process in place to assess the sustainability factors of the underlying investments.

Standardization

Although greenwashing can imply intentional deception, there is also some accidental greenwashing that occurs due to the lack of standardization or regulation of ESG disclosures. Say, for example, that an ESG asset manager markets a fund as sustainable. The manager will invest in companies that have a history of decreasing greenhouse gas emissions, including energy companies. An individual investor may look at the fund and be surprised to see an energy company included. This isn’t greenwashing, but rather a difference of opinion of what “sustainable” means. Without standardized definitions, methodologies, and regulations, this form of accidental greenwashing will be difficult to avoid. Because of this, some areas of the world have already started to implement standardized ESG disclosures, and the U.S. and agencies within are exploring this.

Let the Investor Beware

There is a clear business opportunity within the realm of ESG. Companies realize that in order to attract investment dollars and consumer support, they must have an ESG story. This all begs the question: how can individuals differentiate between a story and a true strategy? Until regulation comes into play, the onus will be on individuals to investigate for themselves. Here are some tips to keep handy:

Request a company’s CSR, sustainability, or impact report. If a company doesn’t have one, or if it includes a lot of fluff or buzz words, it’s a red flag.
When investing in products labeled “ESG” or “sustainable”, ask the portfolio manager or analyst to explain the screening process to you. If they have a hard time articulating this, or don’t have much to say, it’s a red flag.
Ask questions, and specifically ask for statistics and data to back up claims. For example, what makes the product “eco-friendly”? If a company hesitates to provide these figures, it’s a red flag.
Look for certifications, such as USDA Organic, Fair Trade Certified, etc. If a product is being sold as all-natural or organic, but doesn’t have a relevant certification, it’s a red flag.

As ESG continues to grow, so will the frequency of greenwashing. Regulation and oversight of ESG disclosure standards will undoubtedly help combat greenwashing. Until then, a healthy dose of skepticism can assist individuals in weeding out the bad actors. If it seems too good to be true, it probably is.

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