What is ESG greenwashing and how to protect yourself?

what is greenwashing ESG products

What is ESG greenwashing?

 

Greenwashing is a marketing trick through which companies characterize their products as more sustainable and environmentally friendly than they really are.

 

Unfortunately, not only is greenwashing common, it is often legal. Think of all the beauty products that use green marketing techniques such as nature-inspired images and words like “natural.” These techniques boost sales, but they do not accurately describe the product’s contents or environmental impact. To know this, you have to study the product contents and research the company.

 

Similar concerns have arisen around environmental, social and governance investing, which does not enjoy strict definitions. ESG investing is booming. According to Bloomberg Intelligence, assets advertised as ESG could increase from $35 trillion now to $50 trillion in 2025. This would be around one third of global assets under management. Although there is some declining interest in 2023, financial services companies have responded to strong demand over time. According to Nasdaq, there are 834 ESG exchange traded funds (ETFs) in the world, and The Forum for Sustainable and Responsible Investment counted 718 ESG mutual funds in 2020.

 

Whilst some of these investment products may be sustainable and socially responsible, others are not. The ESG investing industry is a bit of Wild West. Financial institutions may be over-hyping ESG claims and regulators are only now beginning to introduce rules and guidelines.

 

Spot the signs of ESG greenwashing
what is greenwashing ESG products
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The use of the greenwashing marketing trick is alarming if you want to align your investments with your ESG values. You should always seek professional advice and undertake your own independent research to verify ESG investment product claims. Here are some of the major signs of ESG greenwashing to look out for.

 

 
Beware of ESG ratings systems

 

 

Firstly, watch out for investment products, such as mutual funds or ETFs, constructed with third party ESG ratingsand scoring systems. These ratings do not always assess a company’s impact on the environment or society. They often do assess how well a company manages ESG risks to returns, such as the risks of environmental regulations eating into profits. This type of ESG analysis is useful for financial risk management and it encourages companies to take environmental, social and governance risks more seriously. However, note that it is fundamentally different to aligning your investments with your values. For example, you might prefer an ESG product that invests in companies trying to improve their impact in the world, through lower carbon footprints or minimizing waste and pollution.

 

 

Bloomberg Businessweek conducted an in-depth investigation into MSCI, which is the world’s largest ESG ratings provider. The investigation found that a company’s record on climate change did not affect its ESG rating. McDonald’s was a case in point. Bloomberg Businessweek noted that McDonald’s received an upgrade in its ESG rating from MSCI despite generating more greenhouse gases than some European countries. The reason for the upgrade was because MSCI judged that climate change does not pose a significant risk to McDonald’s profits.

 

forks with fried potatoes with ketchup on yellow background

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In addition, beware that third party ESG ratings systems do not correlate with one-another. This means that ESG ratings providers are not drawing the same conclusions about the ESG qualities of companies. There is no science of ESG rating and it is important to know this when considering ESG investment products.

 

 

Be careful around the word ‘green’

 

 

Secondly, any ESG fund or ETF may apply a different standard for what constitutes a green activity. Green is a subjective word and, importantly, there is no legal definition in the USA. It is up to the investor to decide whether the investment product on offer meets their own green definition and sustainability goals. The European Union is now introducing definitions and standards which will influence U.S. corporations as well as many others.

 

 

Look out for public companies using greenwashing marketing techniques

 

 

Thirdly, look out for corporate greenwashing. Publicly owned companies do have to report on ESG issues that pose material risks to their finances. However, they have wide latitude to decide what is material, and wide latitude on what they choose to either highlight or not mention. Although many large companies are now hiring sustainability teams, many ESG reports are still produced by public relations departments that have been associated with greenwashing marketing. The body authorized by the U.S. Congress to protect American investors, FINRA, recommends looking at companies’ SEC EDGAR filings because these offer a more comprehensive picture than marketing materials.

 

 

Protect yourself from ESG greenwashing

 

 

Above all, always ask for detailed information on how an ESG fund or index is constructed and make sure you are satisfied that it aligns with your goals. Also, look at the top holdings in the fund or ETF. Common sense will tell you how aligned the investment product is with your values. There are many investment products to choose from on the market.

 

Furthermore, although FINRA does not approve or endorse any professional ESG designations, you can look for professional financial advisors and planners with ESG certifications, such as the Chartered Sustainable Responsible Investing (SRI) Councilor designation. Find out about their sources of ESG data and analysis and how they identify greenwashing marketing.

 

Moreover, follow FINRA’s investor tips for ESG investing. FINRA highlights, among other things, to be on the look out for green scams and greenwashing, and to always read the fine print, stay diversified and know and compare fees.

 

 

What are regulators doing about ESG greenwashing?

 

Importantly, the European Union has defined a Taxonomy of Sustainable Activities. Companies are required to report using these standards, which helps investors to identify more easily whether or not they are investing in sustainable economic activities. The Taxonomy came into effect in 2022, and these standards, along with other EU initiatives, should help to close down the space for greenwashing in Europe. 

 

In addition, the U.S. Securities and Exchange Commission (SEC) launched an ESG and Climate Enforcement Task Force. Its purpose is to identify and investigate cases of ESG-related misconduct. In 2022, the SEC also proposed rule changes that set climate reporting standards, including requiring climate-related disclosures that could be subject to assurance. The rules are expected to be adopted soon.

 

Furthermore, a non-governmental International Sustainability Standards Board was agreed at the Glasgow UN Climate Change Conference. The Board proposed its first voluntary disclosure standards framework this year, which could apply to corporate sustainability disclosures for financial markets around the world. 

 

If you want to know more about regulators’ actions to stop ESG greenwashing, our Quick Start Guide to Global ESG and Sustainability Standards explains new and emerging rules around the world.

 

Undoubtedly, ESG-related litigation will also grow as more investors challenge greenwashing. In turn, this could add momentum to regulators’ efforts to standardize ESG definitions and reporting.

 

 

Clearly, ESG investing seems set to continue. However, as regulators move in, time may be running out on greenwashing in the ESG Wild West.

 

If you would like to learn more about ESG, read our ESG for Beginners and sign up for our newsletter to stay informed.

 

ESG Hive never offers investment advice. This blog does not constitute investment advice. We are an educational community offering learning material, data and links to expert resources. Always consult licensed finance professionals and independently research and verify information.

 

 

Tags :
ESG indexes,ESG Investors,ESG litigation,ESG ratings,EU Taxonomy,FINRA,ISSB,SEC
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