Green investing ran hot in 2022, with ESG funds mostly dodging the torrential outflows witnessed in other sectors despite underperforming traditional funds. In 2022, sustainable investing accounted for 7% of all fund assets under management – up from 4% in 2021. An impressive 89% of investors incorporate ESG criteria in their decision-making.
The green investing crazy has led to the introduction of a plethora of products and vehicles intended to offer green portfolio exposure. The number of available ESG ETFs alone doubled in 2022 to meet demand.
Public opinion is squarely in support of the growing green economy, be that support a function of principle, politics, or portfolio performance. This sentiment has driven everyone from technology producers to policymakers, lobbyists, marketers, and PR practitioners to find ways to position their products, offerings, and policies in a favorable green light.
But green messaging can be misleading. This practice is referred to as “greenwashing.”
The term “greenwashing” describes the process of “spinning” company products, operations, and initiatives as environmentally friendly in a manner that omits, obfuscates, or misconstrues the actual environmental impact and motivations of the organization.
Coined by environmentalist Jay Westerveld in the 1980s, the term’s origins provide an excellent illustration of the problem. While visiting a high-end resort, Westerveld noticed the hotel encouraging guests to reuse towels. They couched the ask in terms of limiting their negative impact on the surrounding reefs by preserving water.
Except the resort didn’t actually care about the reefs. In reality, their expansion plans had turned costly, and reducing laundry costs offered one way to tighten the belt. Consumers never heard that part of the story. All they saw was a brand that loved the environment.
The idea behind greenwashing is that companies can generate goodwill not by doing good, but by appearing to do good. In a world where two-thirds of Americans believe businesses aren’t doing enough to combat climate change, one can understand the strategy’s appeal.
You’ll find no shortage of investment products and advisors out there claiming to be green. Whether using words like sustainability, environmental, climate, or ESG, they tout their purported green bonafides as an ecological panacea with greenback benefits.
A closer examination of these investment opportunities reveals far more shades of brown and grey than emerald. Research from ESGBook suggests that a significant amount of “climate funds” allocate nearly 40% of their holdings to non-climate investments. Many include substantial allocations in the fossil fuel and mining sectors, including investments in companies like Shell and ExxonMobile. The same research also found that the portfolios of one in seven climate funds actually had a larger carbon footprint than their non-green counterparts.
An argument may be made that these non-green selections could be seen as green transition investments. This classification applies to investments in companies, products, and organizations which do not directly benefit the environment but are trying to lessen their negative impact.
This might be a reasonable perspective if funds attempted to foster balance between green impact investments and green transition allocations. They do not. And their performance? Other reports found that, among funds greenwashing themselves, most reported that only between 3.1% and 3.9% of their revenues came from actual green investments.
As often happens when financial innovation causes a surge in product offerings, regulators worldwide have turned a discerning eye toward the ESG investing space, specifically.
In the US, the SEC released a set of proposed rules surrounding ESG disclosures by companies and funds. The new rules would require companies to detail their impact on the environment and the results of their ESG efforts with data. That includes everything from the company’s independent carbon emissions to the emissions generated by its supply chain and beyond. Greenwashing becomes more difficult when painting with watercolors like that.
Perhaps more importantly, they would extend the so-called “Name Rule.” This rule requires that 80% of underlying investments align with the strategy described by the product’s name. If passed, the rule would now cover any fund named using words tied to ESG, sustainability, or climate change. In the context of green investing, this means we couldn’t launch a “Financial Poise Sustainability Impact Fund” with a portfolio dominated by allocations to bank stocks, dominant tech companies, healthcare, and treasuries… and a 5% allocation to green technology producers.
The EU leads the US in its efforts to combat greenwashing. Taxonomy laws and rating systems offer substantially more visibility on portfolio construction and impact. While imperfect, these steps provide greater investor protection and meaningful green access in a climate riddled with ESG mandates.
The greenwashing of companies and products makes due diligence more important than ever. A little digging will help you determine whether your dollars are going toward something green or just chasing it. You’ll want answers to questions like:
This list could go on and on. In reality, your best bet for dodging greenwashing is to speak with a financial professional. Between their experience, expertise, access to resources, and understanding of your goals and values, they will be able to offer the insights you need to make greener decisions today.
Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!
©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
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