How investors and companies in the ESG marketplace use the concepts of marketing and promotion to their advantage.
In recent years there has been a surge in popularity around ESG—Environmental, Social, and Governance—investing. This shift in opinion has largely been brought about by the idea that your assets should be able to produce more than just financial returns; they should interact with communities, produce what economists would call ‘externalities’, and result in other returns that can be grouped into environmental, social and governmental impacts.
2021 in particular, has added to the popularity of this style of investing as global trends and consumer demand get influenced by climate change, net zero emissions targets, fossil fuel divestment and the impacts of the COVID pandemic.
Greenwashing in ESG investing
Greenwashing, when put simply, refers to when a company is using words, PR and imagery to make themselves appear more ethical and environmentally-conscious than they really are. As Alexandra Brown, Founder of Invest with Ethics, said “I think some of the examples would be fund managers stating that they screen out certain things like fossil fuels, but they only screen out certain types of fossil fuel.”
Greenwashing is common because funds want money from investors so will try and make their product look as attractive as possible. They will show facts and figures that make them appear very ethical, but this may not be the full picture.
Exaggerating when it comes to your ethical and environmentally-conscious credentials can be an issue for investors as it takes a lot of effort to dig deep, and there is only a limited amount of ways that you can uncover this information yourself.
What messaging is being fed into the marketplace?
Whenever anything is popular, there will always be those that try to take advantage of the situation and take whatever shortcuts they can in order to reap the benefits. People want to get as much as possible for as little effort as they can–that’s physiological and behavioural finance.
Many companies, funds and investors will try to exaggerate their green credentials, known as greenwashing, which has led to the need for ESG companies to be evaluated and produce measurements that can help investors gauge how ethical their practices really are.
Another way that greenwashing has become common in the marketplace is through companies focussing on what they plan to do in the future. They will make large promises in order to secure investments, but these promises are all too often empty. There should always be evidence to show that they are actually working towards these goals before making grand promises.
The biggest issue that the marketplace is facing as a response to greenwashing messaging is that there is no real agreed set of metrics that can be used as a benchmark to compare different funds and companies.
Organisations are free to come up with their own measurements and make them look good. For investors who take these figures at face value, they may not be getting the full picture. In order to figure out what’s really going on, you need to drill deep to get a good idea of performance.
How to avoid greenwashing in ESG investing?
When it comes to weeding out the funds and companies that are greenwashing, you want to look for organisations that are really making an effort to measure their impacts. They should also be able to clearly explain how they’re coming up with these measurements and what framework they’re using.
It’s important to really dig deep into a fund and see what their major holdings are and whether they’re transparent or not in the way that they are reporting their information.
“You can also check what their voting record is on particular ethical and sustainable issues. And I also like to see what their governance practices are like, and if they’re actually moving along the lines of what their policies and philosophies say they are.” says Elizabeth Hatton Director at Viva Financial Planning.
Tips for advisers
When it comes to investing, you shouldn’t take anything on face value, you always need some kind of background information. Luckily for us, there are places online that rate funds in terms of how green they are from an ethics perspective.
There’s currently a lot of demand for ethical investment advice, so it’s a good chance to get into the space and stand out. Remember that, similar to fund managers, advisers should also be transparent about what they can actually provide.
Advisers can also easily fall into greenwashing, so you should always be careful with how you use websites, social media, and client newsletters. They can be an excellent place to highlight the ESG issues you specialise in to demonstrate expertise, but make sure you’re not exaggerating too much.
