Whether you’re a citizen, consumer or investor, the ability to call out greenwashing is fast becoming a key life skill. Misleading or unsubstantiated claims about climate credentials can make it harder for people to make informed decisions. They can also undermine genuine efforts by companies to clean up their act and tackle the climate crisis.
The basic problem is a lack of clarity. Indeed, when it comes to spotting greenwashing, it can actually be more helpful to focus on the colour grey – because it’s the many grey areas that have helped make greenwashing so endemic. These grey areas might be around measurements, definitions, best practice, standards or regulations. Even the language we use is very imprecise, leaving lots of room for vagueness, obfuscation or outright deception. For instance, what do words such as “green”, “sustainable” and “eco” even mean?
These problems are increasingly important when it comes to the greenwashing of investment products, such as pensions and investment funds. In recent years, there has been a sharp rise in consumer demand for funds that invest according to environmental, social and governance criteria, often referred to as ESG funds. According to the financial data provider Morningstar, the value of assets held in UK funds that invest according to stringent environmental and social principles grew from £29bn at the beginning of 2017 to £71bn by the end of 2020.
With that much money at stake, misleading claims can effectively hamper the flow of money and resources into genuinely green initiatives and businesses – thwarting global efforts to tackle the climate emergency.
Part of the problem is the relative nascency of the responsible investment industry. “There have been a lot of new entrants into the market and a lot of innovation,” says Ashley Hamilton Claxton, head of Responsible Investment at Royal London Asset Management, part of the Royal London Group. “I describe it as the ‘teenage years’ of responsible investing, with a lot of experimentation and boundary testing, and a lot of people trying out new things.”
The name game
As with the “green” labels so often stamped on supermarket products, language and definitions are crucial when it comes to responsible investment products. Hamilton Claxton says it’s important to understand a fund’s actual objectives. Is it aiming to invest in companies with good ESG credentials, or in companies that offer solutions to the world’s biggest challenges? A fund with a climate theme may not invest solely in green companies – it may invest in companies that don’t necessarily have strong green credentials today, but have the intention and the plans to improve their environmental profile.
“Investors should be really conscious of fund names, because the name doesn’t always explain what the fund is doing,” says Hamilton Claxton. “You need to look under the hood at the fund’s holdings and ESG characteristics. Don’t just rely on the fund name, because you can be misled, as different asset managers will use the same name or label in very different ways.”
As well as launching new products, some existing funds have been rebadged as sustainable; effectively marking a change to the fund’s name or description without the investments changing. “There is a lot of rebadging of existing investment funds,” says Hamilton Claxton. “You need to look at the list of companies the fund is investing in – the top 10 holdings are normally available publicly on the company’s website – and this will enable you to see whether the fund’s name has changed, but the holdings haven’t.”
Bad faith, hypocrisy or inconsistency?
It’s worth noting that fund managers themselves have to be on guard against greenwashing when they examine which companies a fund should invest in. The lack of agreed ESG standards with metrics and comparable data means asset managers have to rely a lot more on their judgment and expertise rather than on audited numbers and financial analysis.
Sometimes it’s relatively easy to know when a company is acting in bad faith – for instance, when it pays lip service to sustainability with a particular product or marketing campaign while deliberately dragging its heels on the carbon emissions from the bulk of its operations. But things aren’t always so clear-cut. A company’s inconsistent behaviour might not necessarily mean hypocrisy. For instance, the transition to clean energy may simply be easier and therefore faster in one area of its businesses than in others. Asset managers have to determine whether or not such inconsistencies constitute greenwashing.
Other variables to consider might include, for example, the actual timeframe for a company’s net zero targets, or whether it takes into account the emissions in its wider supply chain – which can often account for the bulk of a company’s actual emissions. Likewise, do its emission-reduction ambitions involve an excessive use of carbon offsets? These refer to projects that reduce or remove emissions, such as planting new forests. Carbon offsets are necessary for some sectors such as the airline industry, whose core business involves emitting carbon – thereby making it impossible for them to reach net-zero without offsets. But offsets can be controversial when businesses use them as shortcuts to avoid making their operations more sustainable.
Check the voting record
For individual investors who are trying to assess the ESG credentials of investment products marketed as responsible or ethical investment funds, Hamilton Claxton advises checking the voting record of the asset manager who oversees the fund. Voting at annual shareholder meetings is one of the most visible ways that asset managers engage with the companies they invest in – whether it’s on climate-related resolutions, or other proposals involving an environmental or social issue.
“The first step is to find out whether the fund manager is actually disclosing how they vote,” she says. “At Royal London we disclose our voting record.”
Royal London is a mutual company owned by its members.
“The second [step] is to look at how they have actually been voting, and whether that is in line with your expectation as a client.”
Investors should also be paying attention to what asset managers themselves are doing and saying about their own business, and whether they are walking the talk. Are they taking a sticking plaster approach to key ESG issues, or is it authentically embedded in the running of the business, and in the investment beliefs and philosophy of the asset managers?
Choosing a fund management company that has a solid track record can provide reassurance to investors. “My advice to investors would be to work with partners and fund management brands that you trust, that have been doing this for a long time, and therefore have that authenticity,” says Hamilton Claxton,
Regulate the grey
Although the responsible investment industry is still in a phase of experimentation when it comes to standards, rules and practices, the potential for misleading claims and substandard funds should decrease as grey areas become more black and white. With financial watchdogs around the world introducing new rules on environmental reporting, attempts to greenwash investment products will become much more difficult.
For instance, under new standards announced by the UK government in October, asset managers, investment providers, and pension schemes will have to disclose the environmental impact of the activities they finance, and justify any sustainability claims they make to investors. “The lack of common definitions around environmental sustainability is leading to greenwashing, misleading investors and consumers about how green a product really is,” the Treasury stated when it announced the new rules. “The new Sustainability Disclosure Requirements (SDR) will ensure investors have the information they need to make informed decisions about where to put their money.”
Likewise, efforts to standardise the carbon offset market should help investors judge when offsets are used for greenwashing purposes.
The introduction of new rules such as these gives Hamilton Claxton cause for hope on the scourge of greenwashing. “Implementing the new regulations will present challenges for asset managers, however, the industry associations are already coming together to create more consistent language and standards,” she says. “The next 18 months or so will continue to be tricky in terms of greenwashing, but beyond that I think we will start to see more standardisation in the industry and as the market becomes a bit more mature things will start to settle down.”
Learn more about responsible investing by heading to Royal London – The Invested Generation