Greenwashing: How investors can cut through the sustainable spin

Greenwashing is probably as old as advertising and public relations. Consumer preference for perceived natural and pure products has led to some very interesting TV ads over the years, including for a brand of cigarettes purporting to be “as cool as a mountain stream”.

The investment world has been no different until relatively recently. Vague and often misleading language was frequently used to give the impression that funds operated to ethical environmental and social principles.

This could even start with the name of the fund, with meaningless labels such as Planet First, Eco Aware, and Nature Plus being applied. They don’t make any direct claim about the investment strategies or policies being employed but people could be forgiven for thinking they are on the side of the angels when it comes to the environment.

Another device employed by greenwashers is to make a token gesture and highlight this throughout the marketing materials. This could be the exclusion of a certain category of weapons manufacturers from the portfolio. Meanwhile, the rest of the portfolio may not be subject to any screening for environmental, social and governance (ESG) factors.

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However, standards have improved in Europe in recent years. The advent of the Sustainable Finance Disclosure Regulation (SFDR), along with the Taxonomy Regulation, have made life a lot easier for investors.

The SFDR is aimed at improving transparency in the market for sustainable investment products, preventing greenwashing and increasing transparency around sustainability claims. Importantly, it sets out categories for funds. Article 6 funds are those that do not promote their ESG characteristics; Article 8 funds are defined as those that promote, among other characteristics, environmental or social aspects or a combination of those, provided that the companies in which the investments are made follow good governance practices.

There is an exceptionally high bar for Article 9 funds. These are funds with sustainable investment as their objective. Some have described them as putting sustainability objectives ahead of making money.

The Taxonomy Regulation underpins this categorisation by providing a classification and reference system for environmentally sustainable activities.

“Sustainability might have been a bit vague in the past but the area has evolved over the past few years,” says Ian Quigley, head of investment strategy with RBC Brewin Dolphin Ireland.

He explains that companies that market funds as having sustainable strategies under Article 8 or 9 have to set out how they comply with the regulation.

RBC Brewin Dolphin Ireland offers a funds solution that is Article 8 compliant, Quigley says. “It promotes sustainable and environmental characteristics and good governance practices,” he adds.

“We try to get a positive return for clients at the same time as looking at ESG characteristics. We look at the carbon intensity of the companies invested in, their impacts in relation to the UN Sustainable Development Goals (SDGs) and their performance in relation to the MSCI ESG rating.

“We look at 12 of the SDGs and categorise them broadly into the areas of prosperity, planet and people, and we look at how the fund aligns with those. We produce fact sheets that explain what we are doing. It’s very well defined.”

The issue has become more important for retail investors but has also presented more challenges, according to Graham Fox, head of distribution at Amundi Ireland.

“The complexity with regard to how funds demonstrate their green credentials has increased and in a lot of cases has become confusing for savers,” he notes.

“A recent survey undertaken by Amundi Ireland suggests that savers’ understanding of terms like ESG and responsible investing is also limited – with only 13 per cent of people surveyed understanding what ESG stood for, even though it is a term that is widely used in fund names to demonstrate that they follow a sustainable investment process.”

Fox believes it is important for people to take professional advice. “Financial brokers are tasked with understanding the range of fund solutions available to savers in the Irish market and, importantly, matching these solutions to a saver’s attitude to risk and also their sustainability preferences,” he says.

KPMG director of Sustainable Futures Andrew Farmer says he has found that evidence of greenwashing can be uncovered through the same means that other questionable activities are uncovered.

“For example, an investment fund that has changed its name many times could indicate unsavoury business practices; a large amount of turnover at the fund’s board of directors could be a warning sign; or a mismatch in what the pre-contractual disclosure represents versus the periodic disclosure could require further due diligence,” he says.

“Among a myriad of other methods to uncover potential greenwashing, I believe it is important to approach sustainable investing with the same caution as traditional investing, where research is key to making an informed investment decision.”