Greenwashing And ESG: What You Need To Know
It’s not easy being green—although environmental, social and governance (ESG) fund managers might argue the point.
So would a lot of other investors. To whit: Total funds invested in some form of ESG asset are expected to exceed $50 trillion by 2025.
However, regulatory agencies in the U.S. and abroad are cracking down on companies that use ESG as a marketing ploy to exploit investors’ best intentions.
There’s another word for this kind of investing fig leaf: greenwashing. So how can investors know if their ESG funds adhere to their social and environmental values? Let’s take a look.
What Is Greenwashing?
Greenwashing is a marketing tactic that companies use to lure in environmentally conscious customers, despite their products or services being anything but.
When businesses represent themselves as sustainable by providing false or misleading information about their practices, that’s greenwashing.
These sorts of claims can range from a Big Oil company running ads showcasing how they help save butterflies, to a manufacturer of disposable consumer goods highlighting their use of recycled raw materials in a tiny minority of their products.
Consumers may not always be aware of greenwashing in corporate advertising and the media. That’s despite some of the biggest corporations in the world being accused of engaging in the practice.
Fast-fashion brand H&M, for example, is currently being sued in New York federal court for making false claims that its Conscious Collection is sustainable. In reality, the company uses more water to manufacture items in the collection than its regular clothes.
Greenwashing and ESG Investing
ESG investing is a strategy that helps people put their money behind companies that score highly on independent measures of their environmental, social and governance practices.
It’s a strategy that’s popular for investment portfolios spanning the generations. A 2021 analysis by Morningstar found that Millennials, Gen X and Boomers all had similar preferences for owning sustainable investments.
Financial institutions have taken note, with the number of investment managers reporting at least one ESG fund in their holdings growing 300% since 2016.
Increased interest in ESG investing has attracted less conscientious actors aiming to profit from the trend, as well as dilution of the metrics and principles that help keep the underlying investments aligned with the goals of sustainability.
Read More: The Best ESG Funds
Greenwashing has become a big problem for ESG. Studies have shown that more and more ESG funds include companies that are far from being paragons of social and environmental responsibility.
In 2021, The Economist studied the world’s 20 biggest ESG funds; it found that each of them held investments in fossil-fuel producers, while others held stakes in oil producers, coal-mining, gambling, alcohol and tobacco.
SEC Is Cracking Down on False ESG Claims
ESG depends upon third-party rating organizations to assess companies on their bonafides, but there is no single, unified standard or methodology behind ESG ratings.
Inconsistencies have muddled what qualifies as adhering to ESG principles, and that can leave some investors confused about whether or not their money is actually backing an ethical and sustainable company.
That could change soon.
The Securities and Exchange Commission (SEC) recently closed a comment period on two proposed rules that would specifically tackle this issue. The proposals would create consistent standards, such as enhanced disclosures to shareholders.
The SEC has also created an ESG enforcement task force to identify violations in disclosure and compliance related to ESG funds.
Critics say the proposed SEC rules hardly go far enough, but climate advocates believe that they’re a step in the right direction.
“Without these rules, Wall Street will continue to get away with duping investors who want products that align with their needs and values,” says Alex Martin, senior climate finance policy analyst at the nonpartisan Americans for Financial Reform Education Fund.
The European Union is a step ahead of U.S. regulators.
Earlier this month, the E.U. enacted rules that give investors the power to hold asset managers accountable if their ESG funds don’t meet expectations, such as being as “green” as they were initially promised.
How to Assess Your ESG Investments
If you’re concerned about sustainable investing, there are ways to scrutinize your investments to determine whether they’re actually good for society and the planet without directly relying on an ESG label.
And if you already own ESG funds, you can take a deep dive into their holdings to determine if your money is supporting companies with a real commitment to sustainability.
Online Tools to Assess ESG Funds
As You Sow, a nonprofit organization for shareholder advocacy, has a free online tool that analyzes the climate and social impacts of mutual funds, exchange-traded funds (ETFs) and 401(k) plans. You can search funds by name, ticker or fund manager to see overall ratings, carbon footprint scores and more.
Searching for the Vanguard ESG U.S. Stock ETF (ESGV), for example, shows that it holds investments in the deforestation and prison industries. MSCI offers a similar free online tool.
If you’re interested in investing sustainably but aren’t currently invested in a specific ESG fund, it’s still worth taking a look at where your money in mutual funds is supporting.
For example, the Fidelity 500 Index Fund (FXAIX), a popular mutual fund, has poor ratings in fossil fuel, deforestation and tobacco investments, meaning a large portion of its assets are invested in these industries.
Specialized Financial Advisors
If you’d prefer not to do your own research or want to realign your portfolio to match your values, check out a financial advisor that specializes in ESG investing.
Green America, a nonprofit organization that advocates for environmental and social economic justice, offers a list of financial advisors that focus on helping people align their investments with their values.
There are also Chartered SRI Counselor (CSRIC) that hold a specialized certification from the College for Financial Planning in sustainable investing.
Overall, ESG investing is on the rise—and the increase in interest means some companies are trying to lure investors in with false claims about their sustainability practices.
The SEC is now proposing two rules to rein in this practice, known as greenwashing—and investors can use it as an opportunity to reevaluate their own ESG funds.