Introduction

 

As the number of stakeholders interested in sustainable investing has been multiplying, the problem of greenwashing became more prominent. Asset managers have quickly realized that claiming to be green-friendly can be a technique to attract new customers. Some issuers express their environmentalist concerns solely to gain the attention of those focused on including sustainable financial products in their portfolios. However, just because an institution claims its products are fulfilling the ESG criteria does not mean it is the truth.

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What is Greenwashing?

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Greenwashing is a process in which asset managers make false claims regarding the sustainability benefits of their financial products. In other words, issuers use marketing tactics to gain traction among clients interested in sustainable investing without actually fulfilling the environmental, social, and governance (ESG) goals. Most of the time, the procedure is intentional, but in some cases, misleading declarations may also be made unintentionally.

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The ESG data provided by large corporations are often not adequately verified. Some firms claim that they fulfill the ESG goals in their practices, but it is far from true in reality. Moreover, it is often the case that enterprises release a large amount of ESG data, but their practices are nowhere close to accomplishing the ESG objectives. Analyzing such a large amount of information is an incredibly tedious task. Thus, a challenge for sustainable investing may not be the lack of ESG data per se but the remarkable amount of unaudited ESG data meant to mislead the stakeholders.

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Examples of Greenwashing

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Unfortunately, ESG greenwashing in the investment world is far from uncommon. According to the studies, more than half of the climate-themed investment funds do not fulfill the agreements laid out in the Paris treaty. Even though some funds may score better regarding the environmental criteria, they still fall behind in the governance categories.

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Many financial actors have an issue with overestimating their environmental credentials and supporting sectors of the economy that are dangerous to the environment. For instance, the investment giants UBS Group AG and BlackRock, Inc. claim to put sustainability as one of the essential values of their ventures. Despite that, reports claim they hold significant investments in the fossil-fuel industry. This is consequential since some fuel lobbying companies prevent policymakers from implementing meaningful climate-change-related policies.

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At the same time, DWS Group has been accused of significantly overstating their products' environmental benefits. Authorities claim that assents owned by the investment company were not as ESG-friendly as it was claimed in the promotional materials.

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Luckily, investors react quickly to any sort of misdemeanor. A group of investors with more than $100 trillion in assets signed a commitment called the Principles for Responsible Investment. According to it, they are committed to integrating ESG data into their decisions. The significance of sustainability has been growing among mindful investors, and it has been further exacerbated after the COVID-19 outbreak.

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How to Battle Greenwashing?

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A study published in the Research in International Business and Finance academic journal in 2020 investigates cases of greenwashing among large-cap companies from 47 different countries. From the analysis, we can learn about the crucial challenges to battling the issue of greenwashing. These are unaudited ESG data, no global governing body, various behavioral issues at the firm level, and no specific regulatory guidelines to ensure the accuracy of ESG data. Those are the matters policymakers and investors worldwide should pay attention to when debating the problem of greenwashing

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The authors of the study also provide a set of mechanisms that, in their opinions, could help prevent the ESG greenwashing. Areas in which companies and policymakers should improve include: more independent directors, more institutional investors, more-influential public interest via a less corrupted country system, and cross-listed status. Assuming those criteria continue to progress, we should see a positive development in the ESG sphere.

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Conclusions

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Greenwashing poses a significant challenge to the world of sustainable investing. Stakeholders should continue to pay attention to asset managers vouching for the quality of their financial products, so those products bring actual benefits to the environment, governance, and social issues. At the same time, policymakers worldwide need to implement regulations that will make the problem of greenwashing a lot less common.

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References

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Fidelity International. (2021). What is greenwashing and how can it be avoided? FIL Investment Management (Hong Kong) Limited. https://www.fidelity.com.hk/en/start-investing/learn-about-investing/esg- investing/what-is-greenwashing

Gunia, A. (2021, September 20). Thinking of Investing in a Green Fund? Many Don’t Live Up to Their Promises, a New Report Claims. TIME. https://time.com/6095472/green-esg-investment-funds-greenwashing/

Hale, J. (2021, October 21). What Is Greenwashing, and Answers to Your Other Questions. Morning Star. https://www.morningstar.com/articles/1062642/what-is-greenwashing-and-answers-to-your-other-questions

Mooney, A. (2021, October 3). Greenwashing in finance: Europe’s push to police ESG investing. FINANCIAL TIMES. https://www.ft.com/content/74888921-368d-42e1-91cd-c3c8ce64a05e

Quinson, T. (2021, January 9). Regulators Intensify ESG Scrutiny as Greenwashing Explodes. Bloomberg. https://www.bloomberg.com/news/articles/2021-09-01/regulatory-scrutiny-of-esg-greenwashing-is-intensifying

Wu, Y., Zhang, K., & Xie, J. (2020). Bad greenwashing, good greenwashing: Corporate social responsibility and information transparency. Management Science, 66(7), 3095–3112.https://doi.org/10.1287/mnsc.2019.3340

Yu, E. P., Luu, B. V., & Chen, C. H. (2020). Greenwashing in environmental, social and
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