Impact or sustainable investing has become a hot topic. Especially in the wake of the COVID-19 pandemic, sustainable investments attracted record inflows as investors turned towards ESG investing, or sustainable investment strategies that consider a company's environmental, social, and governance ratings along with traditional financial metrics. Along with the increase in sustainable investments, a new issue has risen with companies and financial firms using "green" marketing and advertising to attract more investors. Suppose you're new to impact investing or simply looking to reevaluate the companies currently in your portfolio. In that case, you may be wondering, "what is greenwashing, and why is it an ethical problem?"
In today's investment age, it can be hard to discern which companies are being truthful about their ESG claims and which ones are making false claims to make a profit while deceiving investors in the process. Read on to find out how sustainable investing has grown, what greenwashing is, and how big of an ethical problem it has become within the ESG and sustainable investing landscape.
Investors are looking for sustainable funds as the era of impact investing is continuing to blossom. In 2020 alone, sustainable funds reached record highs hitting $1.7 trillion in 2020, more than double that of 2019. But with the increase in ESG and impact investing, a new problem has surfaced within the financial services industry as companies compete to get their products and services noticed by investors—sometimes through unethical means.
What is Greenwashing?
Greenwashing, also known as "green sheen" is a tactic performed by companies to manipulate information to support their environmental, social, and governance (ESG) claims. This means that companies may be showing false reports or marketing hype to overstate their ESG efforts.
Greenwashing can mean that companies promote products as more natural, less wasteful, free of chemicals, and more eco-friendly than they really are to intentionally mislead consumers and investors or, at minimum, exaggerate their environmentally-conscious business practices. A company can also claim that its services or products are supporting local, underdeveloped communities, fighting governance issues, or supporting initiatives that make the world a better place. Although a company may claim to be committed to being green-conscious, they may spend more money marketing this fact than following through on their claims.
Greenwashing has become a major ethical problem as companies offer misleading environmental claims and vague promises about their products or services that do not actually help the environment or community. Greenwashing can be done by companies and financial services firms. Companies may deceive their consumers with marketing and advertising tactics that state their business is promoting sustainability, while financial services firms can greenwash by overstating ESG investment fund claims to persuade investors to invest in their funds.
Signs a company is greenwashing
Many companies can perform greenwashing tactics with several different methods. Greenwashing can portray a false impression of a company and its products and services. Companies that are genuinely ESG-friendly and sustainable always back up their products with facts about the sustainability details behind them. One significant sign of greenwashing is if a company spends much more money on marketing tactics than they do on actual ESG efforts.
Other ways to spot greenwashing include:
- When the packaging and advertising is vague and does not specifically explain the product's sustainability claims in understandable and readable print and language.
- When the company tries to overstate their green benefits in comparison to competitors' green products or services.
- When the company advertises the positive information but hides the negative. This is also called selective disclosure.
- When the company makes claims to draw attention to minor issues but does not back up their claims with action, also called symbolic actions.
Another technique that companies may use to distract customers and investors from their less than satisfactory ESG efforts is to put ESG claims at the forefront of their product packaging and/or marketing. Companies may market environmental or other ESG claims on their website, product packing, advertisements, or communications with investors. However, if you were to research these claims and do a bit of digging, you may find that these claims aren't exactly what they seem to be.
How to avoid greenwashing
It's an unfortunate fact that greenwashing exists in our world today. After knowing the ins and outs of greenwashing, you may be wondering how it can be avoided in the first place. The good news is that investors can use various tactics to see through marketing ploys and other greenwashing techniques that companies and funds use.
1. Do your research
One of the most significant ways to avoid placing companies that practice greenwashing into your portfolio is to deep dive into the company's actions surrounding environmental responsibility, social issues, and any other impactful issues that you may find pressing for your own investment needs. For example, if you're checking the environmental impact of a food company, you may look into sources such as the Ecolabel Index to see if the products they're producing are certified as environmentally friendly.
ESG funds may publish impact reports that showcase the real-world impacts that their investments are making. These reports provide a great opportunity for investors to see exactly where their money is going and get a better sense of the impact the companies they're investing in are having on the world.
Companies themselves may also publish Corporate Social Responsibility (CSR) reports. Many companies of all sizes publish these reports to garner support from the public and investors when it comes to their ESG efforts. It's essential to keep in mind that these reports are from the company themselves and maybe biased or inflated the company's efforts to make them appear stronger than they actually are.
2. Find Reputable Sources
When looking for information on specific companies, it's essential to know that the information you're getting is unbiased. That's where the power of third-party sources and providers comes into play. Gather your data from sources such as Nasdaq and Morningstar's ESG scores, as these providers perform independent audits of information from public and private companies to compare their ESG efforts.
Third-party sources should not be used alone, however, they can be used as a guide in identifying whether companies are truly ESG-driven. These insights can be a part of investors' strategies towards incorporating ESG into their portfolios.
3. Know the importance of data
Tools such as artificial intelligence can help sift through the massive amounts of data from companies to help investors spot greenwashing. These systems make data more accessible by looking through various data sources simultaneously to get the most up-to-date information as quickly as possible. AI is the future of data analysis, and this is shown through the accessibility of information AI and ML provide. Again, the importance of data shouldn't be understated. In addition to using third-party sources, AI can be the next step in accurately understanding and obtaining a full picture of a company's ESG claims.
For an example of how AI can be used in identifying ESG claims, check out our blog post on using AI to identify corporate ESG practices.
Why is greenwashing an ethical problem?
Greenwashing is a huge ethical problem as companies can profit from deceiving shareholders, investors, potential investors, and consumers. Additionally, companies use greenwashing to gain a competitive advantage quickly and without having to spend the time and money to actually make a difference. Greenwashing has been around for some time, but as technology continues to advance and new ways of marketing are being introduced, the level of greenwashing from companies also continues to advance.
Greenwashing deceives people who put their time, money, and faith into a company and has detrimental real-world impacts. While the EU has introduced new rules to help prevent greenwashing, many countries, including the US, have not introduced such policies. Greenwashing is a major ethical problem for the simple fact that it deceives others for the sake of financial gain, while completely disregarding ever-more pressing environmental impacts.
For example, greenwashing prevents achieving goals like the UN Sustainable Development Goals. The SDGs are a framework that tracks how the world is doing in terms of sustainability, the impact corporations have in achieving these goals, and the gaps that need to be filled. When companies greenwash, there is less transparency and accuracy on ESG and sustainability metrics. Greenwashing can also lead to negative perceptions about a company and ultimately damage the corporation's reputation.
The impact of greenwashing on a company's reputation can include:
- Reduced revenue
- A decline in brand image
- Consumer disengagement and broken trust
- Reduced capital from investors
- Negative publicity
- Negative impact on workforce management
The significance of greenwashing on investments
When It comes to ESG investors, over 44 percent said their main concern was greenwashed investments. This number is only likely to grow as more companies work to improve their ESG standings. It's only inevitable that some will do so in a negative or untruthful way.
The rise of socially responsible investing (SRI) brings an increase in greenwashing, which has led some businesses like oil companies to be included in funds that investors would not have expected. When it comes to investments, one reason it has been easy for funds to greenwash is because of the numerous ESG data providers and various ways that ESG evaluations are done. Without a universal standard, it can be hard for investors to know which ESG ratings can be trusted.
Knowing the signs of greenwashing and educating yourself on the possible greenwashed companies in your portfolio can help further your impact investing efforts. When it comes to staying educated, it's always important to do your research and maintain the latest trends in the industries that affect your portfolio the most. Fortunately, there are various sources and artificial intelligence programs out there that make this process a simple one.
For more information on the impact of greenwashing and how investors can avoid it, check out our on-demand webinar on filling in the gaps of ESG data for investing.
About Accern
Accern is a no-code AI platform that provides an end-to-end data science process that enables data scientists at financial organizations to easily build models that uncover actionable findings from structured and unstructured data. With Accern, you can automate processes, find additional value in your data, and inform better business decisions- faster and more accurately than before. For more information on how we can accelerate artificial intelligence adoption for your organization, visit accern.com