What is greenwashing in finance and how can you spot it?

From ‘sustainable ETFs’ to ‘socially aware superannuation’, financial institutions are increasingly marketing their products as being environmentally or socially friendly. While the swell of institutions responding to the climate crisis is encouraging, it can also be hard for consumers to tell if a company is genuinely having a positive impact, or if it’s simply marketing spin.

What is greenwashing?

Coined in the 1980s by environmentalist Jay Westerveld, greenwashing is when a company markets itself as doing more for the environment than it actually is. It may involve the company making false or misleading claims about its green credentials.

The practice of greenwashing permeates many industries—touching everything from fashion to food to finance. In a financial context, marketing products as being ‘green’, ‘sustainable’ and ‘ethical’ has now become highly profitable.

Globally, Bloomberg says environmental, social and governance or ‘ESG’ assets are on track to hit $US53 trillion by 2025, which would represent over a third of projected assets under management.

In Australia, the responsible investment market is also continuing to gain traction. Associated assets under management increased by 17% over the course of 2019 to $1,149 billion, according to a report from the Responsible Investment Association Australasia (RIAA), a group that certifies products marketed as responsible and ethical as being true-to-label.

“We are in a rapidly growing market where loads of Australians want to invest in ethical, responsible and sustainable products,” Simon O’Connor, CEO of the RIAA, told Canstar.

“That does lead to a real risk of greenwashing and we do occasionally see products that are making claims about what they can do in the responsible and ethical space that goes beyond what they are able to substantiate.”

What are some examples of greenwashing?

“Some funds are being rebadged as ‘green’ without really changing what they are doing in terms of their investment philosophy,” Maria Loyez, Chief Customer Officer at Australian Ethical, an ethical superannuation and wealth management company that manages $5.4 billion, as of March 2021, told Canstar.

“An example is that there are some funds that are marketed as ‘sustainable’ or with an ‘ESG’ badge, but they still invest in things that have very high carbon emissions,” she said.

“All they are doing is valuing them differently so they are still included in the portfolio but maybe at a different asset allocation.”

This was echoed by Tariq Fancy, the former Chief Investment Officer of Sustainable Investing at BlackRock, the world’s largest asset manager with $US8.67 trillion assets under management. Earlier this year, the former executive wrote an op-ed calling out greenwashing on Wall Street.

“In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community,” he wrote.

Innisfree has been accused of greenwashing for saying “Hello, I’m Paper Bottle” after a consumer cut the container in half and found a plastic bottle inside. https://t.co/zQnwiMgSRG

— Hyunsu Yim (@hyunsuinseoul) April 8, 2021

In Europe, German banking giant DekaBank was recently called out for alleged greenwashing. The bank was sued for allegedly misleading investors about the positive impacts of one of its funds. The bank used an ‘impact calculator’ to market the fund, which quantified the positive difference an investment could make.

For example, the calculator may have been used to suggest the amount of carbon dioxide emissions and waste that could be saved by investing in a DekaBank fund.

It was alleged that the calculator was misleading because the positive impacts were only based on estimates, not evidence, and did not take into account all the companies in the fund. The bank avoided legal action by removing the calculator from its website.

Mr O’Connor said he has seen very few examples of “outright greenwashing” where a financial product is clearly trying to mislead Australians.

“What we see more often is lazy or non-specific language being used that has the potential to confuse consumers.

“[There are also] product providers not being clear enough about what they are actually doing to deliver on the responsible investment promise they are making on the label.”

Is greenwashing regulated?

In Australia, there are no specific laws prohibiting greenwashing. However, greenwashing can be captured under Australian Consumer Law, which prohibits misleading and deceptive conduct and false and misleading representations and can lead to serious penalties.

Globally, regulators are taking steps to stamp out greenwashing and provide clearer guidance on which financial products can be labelled ‘green’ and ‘sustainable’. Notably, the European Union recently introduced the EU taxonomy for sustainability activities, which is a list designed to outline which investments can be classified as environmentally sustainable.

How can you spot greenwashing?

As investors, how can we tell when a provider is greenwashing? Here are four questions you can ask to help put yourself in a better position to spot greenwashing:

1. Is the product information vague?

If you can’t clearly see what the product is doing in the responsible or ethical investment area, this could be a sign of greenwashing.

“Consumers should expect to see more from an investment product than merely a high-level statement of what they are doing,” Mr O’Connor said.

Transparency is also key in terms of what companies the product is invested in.

“Customers should be able to see the companies that they are going to be invested in and there should be clear, simple information,” Ms Loyez added.

2. What is the product investment strategy?

There are a lot of different ways of implementing responsible and sustainable investment strategies. That means that products labelled ‘ethical’ or ‘sustainable’ may range from funds doing positive impact investing to funds that are simply applying mainstream exclusions (such as tobacco and controversial weapons, for example).

As part of the RIAA’s certification program, Mr O’Connor says it will look through a fund’s portfolio holdings and ask, “Are these the types of companies that the average consumer would expect to see?”

Look out for products that are labelled ‘green’ and include some companies with strong environmental and social scores, but also companies with poor social or environmental features.

Ms Loyez said it’s worth looking at how rigorously the fund screens the companies that it considers for investment. You may also want to check how much of the product’s offerings are responsible and see if the whole fund follows an ethical investment approach or just a couple of investment options.

3. Is the provider reporting back?

Good investment products will report back to customers on how they are progressing on their sustainability or ethical commitments, Mr O’Connor noted.

This might include reporting on how the provider has effected change, how it improved sustainability outcomes or how it changed corporations through engagement.

“Keep an eye out for funds that make exaggerated claims about their impact,” Ms Loyez said. “There should be a history of sustainability reporting and quantifying their impact claims.”

4. What are your own individual ethics?

Your personal views around sustainability may be deeply personal and unique to you.

“Investors need to be aware of whether the products they are buying meet their own ethical standards, rather than just being packaged up as green,” Ms Loyez said.

Keep in mind with investing that past performance is not an indication of future performance. If you are looking for help with your finances and want to receive impartial advice, you may like to consider speaking with an independent financial adviser.

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