Greenwashing companies are trying to load ethical investors with guilt to make their businesses seem better prospects than their rivals by making dubious claims about their principles.
At a time when money is pouring into responsible investing, marketing men are putting a spin on their green credentials that may make funds and companies seem more environmentally sound than they really are.
One in four people would rather invest in a fund or company helping to combat climate change, according to research that spoke to 2,000 people by fund manager Rathbone Greenbank.
But it’s hard to spot the heroes from villains as anyone can claim they are ‘green’ or ‘environmental’ without fear because there are no legal definitions of the terms.
Market watchdogs the Financial Conduct Authority and the Bank of England are looking at ways to clean up the market. Meanwhile, how do responsible investors make sure they re not backing a fund or company making false green claims?
Table of Contents
Billions Flow Into Ethical Investing
Data from fund manager trade body the Investment Association (IA) shows £900 million a month flows into ethical investments.
But the body is worried that investors are confused about industry jargon and often fail to find the investments they want because of greenwashing.
“The lack of a common language has been a significant barrier to date to the growth of responsible investment and with our first ever industry-agreed framework, we have come together to address this and make it easier for all savers to understand the opportunities available to them,” says IA spokesman Galina Dimitrova.
“But we know there is more work to be done.”
The result is the Responsible Investment Framework – a list of green terms and standards to make fund labels easier for investors to understand.
How Companies Dress Up Their Green Credentials
Spotting greenwashing is not easy. Companies will claim that their factories and products are natural, healthier, chemical free or recyclable without any proof they are telling the truth.
The first greenwashing campaign is blamed on hotels in the 1960s.
Hotels ask guests to reuse towels to help the environment, but the real benefit doesn’t go to the planet but to the hotel, which has lower laundry costs from not washing towels so often.
Another greenwashing tactic is to promote recycling. A company might say the bin bags they sell are 100% recyclable but go into non-recyclable garbage. The claim is true but makes no difference because the product automatically goes to landfill and offers no eco-friendly benefit as the bag is unlikely to be reused.
The clues to a greenwashing claim are big claims and vague words not backed up by facts or data.
A bank or company spending £100 million on renewable energy projects while lending £500 million to less clean and environmentally friendly projects is not really playing the green game.
Checking Green Credentials
Ethical investors can take steps to check the green credentials of a potential investment.
The problem is no common industry standards to measure against.
Investors can follow the Investment Association jargon framework and only consider investing with funds that clearly explain their values of ESG (environmental, social and governance).
The trade body has hammered out definitions for five ethical investing terms that fund managers should follow:
- Stewardship – Responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, environment and society.
- ESG integration – The systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions
- Exclusions – A ban on certain investments from a firm, fund or portfolio
- Sustainability focus – Investment approaches that select investments on the based on fulfilling certain sustainability criteria and/or delivering on specific and measurable sustainability outcome(s)
- Impact investing – Investments made to generate positive, measurable social and environmental impact alongside a financial return
A separate, useful online tool for detecting greenwashing is CSR Hub. Hub researchers do the leg work by investigating green claims and scoring them
Investors can browse thousands of companies by name, sector or country.
Other agencies produce green ratings, but most disagree on how to arrive at a green ranking, so their results are not comparable.
The Ethical Investing Dilemma
While every investor wants to support funds and businesses combatting climate change, the sad fact is ESG and green considerations don’t always go together with portfolio diversification.
Although managers like to give their funds an ethical branding, their own rules often mean they must invest in companies that greenwash or fail the ethical test because they are still fossil-fuel-based.
Add to that many green-compliant companies are not large enough for a stock market listing, which sees them drop off the ethical investing radar.
Instead, the money men play lip service to green credentials by staking large sums of money in ‘influencers’ – companies that look green but aren’t when you scratch the surface.
Peeling Back The Green Sheen
You can spot the green sheen by marketers if you know how.
Look for these unsubstantiated claims:
- The hidden trade-off – Calling a product green by applying a narrow set of rules
- No proof – Making ethical claims without independent verification
- Window dressing – Branding a company or product as eco-friendly in a way that makes a small environmental benefit seem more important
- Irrelevance – A truthful claim that really makes no difference to the environment
- Spending patterns – A key measure that looks at what a company spends on marketing compared with the cost of environmentally friendly trading
Are You A Green Investor?
You’re probably not a green investor unless you have taken steps to investigate the credentials of the funds and shares in your pension savings.
Most of us invest in our workplace pension’s default funds, most of which have stakes in companies like the big energy firms still drilling for and pumping oil, tobacco producers and arms manufacturers.
If you want to banish non-green investments from your portfolio, you must check what the fund manager or company says about ESG commitments.
But remember the financial benefit you will gain from ethical investing is likely to be less than continuing with non-ethical funds and stocks.
You need to keep an eye on how green your investments are and decide whether to ditch them and suffer the financial consequences or continue until greener options that don’t hit the fund value are available.
Pension consultancy Redington asked 104 fund managers with £10 trillion of assets under management about their green policies.
Three out of four (74%) agreed they considered ‘climate-related risk and opportunity’ when investing. Still, only 60% could prove how green thinking influenced their buying or selling stocks.
Digging deeper, 39% could not show engagement in ESG investing, and only 62% had an ESG policy to work with.
But while funds seem to pay lip service to ESG investing, another survey by green bank Triodos reveals that 78% of young adults – those aged between 18 and 24–are interested in ethical investments.
Greenwashing shows how far some companies will go to bend the truth without telling deliberate lies to make a buck.
If you are an ethical investor, you must take care about the source of the data and advice you follow.
Investors have lots of questions about greenwashing and ethical investing – and here are some answers to those they ask the most.
What is greenwashing?
Greenwashing is when funds or companies make unsubstantiated or overblown claims about their ESG credentials to attract consumers or investors.
Typical strategies include concealing negative outcomes, displaying selective information and highlighting the brand’s side of the story.
What are the greenwashing warning signs?
A good indicator of green credentials are companies wording packaging with terms like pure, natural, earth-friendly, eco-friendly, organic, green, reduced emissions, sustainable development, carbon-neutral or biodegradable.
How can I check a company’s green credentials?
If you don’t know where to look it’s not easy to check a company’s green credentials.
Corporate web sites and annual reports are the place to start. Honest ESG companies will make the information simple to find and offer clear explanations and data to support their claims and policies, like a sustainability report.
Can agencies offer independent views about ESG investing?
Several agencies out there can offer certification or eco-labels, but the providers are small and fragmented, while there are no common industry standards to work to.
You must check if the ESG claiming company bankrolls the certification agency. This could be direct or indirect, like sending money through a trade body.
Which companies are greenwashing?
Lots of companies get into trouble for greenwashing. In recent years, car makers have proved to be among the worst by rigging vehicle emission tests.
Volkswagen spoofed special software designed to measure engine emissions on 11 million vehicles – and they were not the only corporate culprits. The company has paid more than £8.2 billion in compensation to motorists.
Here are a selected few articles that are related and may be of interest: