Greenwashing in Finance: What it is and how you can avoid it
Learn more about the deceptive marketing tactic that's being used to mislead environmentally conscious investors, plus five tips to avoid it!
By Asiyah Choudry
January 26, 2022
What is greenwashing?
Greenwashing is the practice of advertising a product, service, or organization as more environmentally friendly than it actually is. The concept of greenwashing was first introduced by Jay Westerveld in 1986, who called attention to misleading marketing in the hotel industry. Since then, the term has been applied more broadly, to include any organization who relies on green marketing to deceive their customers.
Greenwashing can take on many forms, ranging from the use of vague buzzwords like “eco-friendly” to misleading imagery to blatant lying. Traditionally, greenwashing was associated with consumer goods, one notable example being the Volkswagen emissions scandal. However, over the past decade, greenwashing has become more prevalent in finance, with growing concern from investors who cite it as the second largest barrier to sustainable investing.
In finance, greenwashing may take the form of an investment fund that advertises itself as “climate friendly” but has holdings in oil and gas companies. According to environmental non-profit InfluenceMap, 71% of ESG equity funds contain holdings that are not compatible with the Paris Climate Agreement target of under 2 degrees Celsius of global warming. Unfortunately, there is no set standard for claiming a financial product or service is environmentally sound and as a result, many funds are not as sustainable as advertised.
Why do investment companies and financial institutions greenwash?
High consumer demand for green financial products has made sustainability into an effective marketing strategy. Across generations, investors are increasingly seeking investments that align with their values and support the vision of a healthier planet. In the US, 88% of millennials are interested in investments that focus on climate change. Analysts at Deutsche Bank have forecasted that the market for sustainable investing will grow to $160 trillion by 2036 – up 433% from 2018. Companies are rushing to meet this demand by creating financial products that either positively impact or appear to support sustainability goals. From 2019 to 2020, the number of sustainable funds available to investors in the US increased by 30%.
Organizations may also turn to greenwashing because it can drive profit. A report by GreenPrint revealed that nearly two-thirds of Americans are willing to pay a premium for sustainable products. The report also found that 78% of consumers would be more willing to buy a product if it was labeled “environmentally friendly”. Consumer preferences reveal that it pays to be sustainable, and many companies are using this knowledge to their advantage.
Another reason that companies may choose to greenwash is because it’s easy! There is no legal framework that defines what constitutes “ESG”, “low-carbon”, or “climate friendly”. Recently, the SEC is taking greenwashing more seriously. In March, the agency announced the creation of the Climate and ESG Taskforce, responsible for investigating misrepresentations of climate risk. The following month, the agency issued a Risk Alert for ESG, which found inconsistencies between the investment strategies of ESG funds and how they were advertised.
Five strategies to avoid greenwashing
If you’re looking to invest your funds more sustainably and want to avoid greenwashing, here are five tips:
1. Does the fund use a legitimate external ratings assessment?
The use of an external ratings assessment to screen investments could legitimize a firm’s claim to sustainability. Use of ESG frameworks like Global Reporting Initiative standards or the Sustainability Accounting Standards Board could be a green flag. However, even without the use of an external ratings assessment, a firm’s approach to screening for sustainability could still be valid.
2. Does the firm disclose their investing approach?
Look for annual reports or statements posted by the investment firm that disclose how investments are screened for inclusion in a fund. This information may also be found in an impact report. A lack of transparency with regard to the methodology used to screen investments for inclusion in a “sustainable” fund may indicate greenwashing.
3. Investigate beyond an ESG label
While an investment fund might carry an ESG label, this might not be reflected in the investment objectives or holdings. A great starting point is to look at a fund’s prospectus, which will inform you about the investment strategies and provide a list of the companies held in the fund. If you find that the fund includes oil and gas companies or some of the top 100 corporate air polluters, then it probably isn’t a good fit!
You could also consider impact investing - an investment strategy with the principle objective of creating positive social or environmental impacts. While ESG is better than nothing, it is important to note that ESG is not synonymous with positive climate impact. Strategies that are more impact-focused, like impact investing are harder to greenwash.
4. Check out the fund's impact report
An impact report will let you know if your investment will be allocated to companies, projects, and initiatives that drive positive change. The impact report can also provide the rationale behind the inclusion of each stock or bond in a fund, enabling greater transparency. The iShares Global Green Bond ETF impact report is a great example.
5. Don’t forget about your bank accounts!
When you deposit your money at the bank, it may be invested into fossil fuel projects. American banks are heavily invested in fossil fuels and many consumers aren’t aware of how their deposits are being used. While many financial institutions may have strong corporate sustainability policies, this isn’t always reflected in their investment strategies. If you are committed to sustainable banking, make sure that your funds aren’t deposited at a top fossil fuel financing bank. If you aren’t sure where to start, check out our list of sustainable banking options!
What can you do?
Greenwashing diverts investors’ funds away from products that actually create positive environmental impacts. To reduce the prevalence of greenwashing in finance, greater government oversight will be critical in cracking down on firms who make misleading claims. It’s important to call out bad practices. If you currently have funds invested in a greenwashed ETF or mutual fund, it’s not too late to divest. This ensures that firms aren’t being rewarded for deceitful marketing practices.
Overall, greenwashing is a risk for those looking to invest in sustainable financial products. Growing consumer demand for green products has resulted in numerous companies turning to sustainability to make a quick buck. Therefore, it is important to do your own research to ensure that the impact of a “sustainable” financial product is aligned with the claims. Using the five strategies outlined above, you should be better equipped to identify false or misleading claims about sustainability.
At GreenPortfolio, we carefully review financial products to ensure that they have a positive environmental impact. Check out our financial product recommendations for a list of non-greenwashed, sustainable investments.
If you’d like to know more about the environmental risk profile of your portfolio, sign up for our waitlist to get first access to our investment tracking tool.
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