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What is greenwashing?

12 November 2021

Solutions Magazine, Manulife Investment Management

How this latest buzzword relates to investing.

With increasing awareness of climate change and social issues, more investors are keen to invest in funds that align with positive outcomes for society and the environment. As a result, the demand for sustainable investment products is growing rapidly. In fact, a recent Morningstar report found that global inflows into sustainable investment products increased by 88 per cent in the last quarter of 2020.¹ By 2025, global assets in this category of funds are expected to surpass US$53 trillion, according to Bloomberg Intelligence.²

It is great that investors are mindful of environmental, social and governance (ESG) related issues and that there is a widening range of sustainability-related products to choose from. However, new challenges have surfaced, including the risk of greenwashing.

Greenwashing explained

Although the term “greenwashing” has been around for a while, it has become more mainstream recently. Simply put, greenwashing is the act of making false claims or providing misleading information about how environmentally friendly something actually is.

Take for example a product is marketed as being made from recycled plastic. That sounds great. However, it is stated in the fine print that only one per cent of the material used to make the product is recycled. While the statement about using recycled plastic is not technically a lie, it misleads consumers into thinking the product is eco-friendly when, in fact, it is not.

Greenwashing can also apply to investing and could happen in a number of different ways. It might be a misleading fund name or marketing that does not reflect the true nature of a fund’s objectives. Other examples might include a lack of adequate information about a fund’s sustainability-related strategies, or a fund manager failing to meet sustainability-related commitments.

Why is this happening?

Ensuring sustainable products live up to sustainability claims is complicated. Due to the rapid growth in demand for these types of products, standardized frameworks are still being established, which should set out:

  • Clear guidance and standardization for disclosure and regulatory approaches
  • Well-developed sustainability-related approaches for asset managers
  • Clear and consistent disclosure requirements, both at the product and asset manager levels
  • Consistent terminologies
  • A clearly defined product classification system
  • A standardized reporting mechanism for asset managers³

How can investors select products that meet their sustainability expectations?

The reality is that most asset managers are financial experts and not necessarily environmental experts. However, greenwashing is less likely when asset managers are clear about their process and transparent about what their funds do and do not.

It is also a good idea for investors to do their own research. Defining their investment objectives, learning about the asset manager, the fund’s holdings, strategies and objectives, and individual companies’ practices can go a long way towards reducing the chances of being misled.

When investors are familiar about the characteristics of a fund, they are more likely to be able to make an informed decision.

Investors can also reach out to their advisor or relationship manager about what is important to them regarding their expectations of a sustainability-themed fund. Here are some questions that may help you in starting a conversation with your advisor or relationship manager about sustainable investing:

  1. What companies are represented within the fund?
  2. How have these companies been assessed to be considered sustainable?
  3. What are these companies doing to help make the world a better place?

When advisors and relationship managers have a clear understanding of their clients’ expectations, they can better help them meet their sustainable investment objectives, identify misleading information, and potentially avoid the risks of greenwashing.

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As an investor, it is important to understand how your personal values can impact investment decisions:

  1. Think about what matters to you. You might wish to avoid certain business sectors if the products or services provided are not aligned with your personal values.
  2. You might feel strongly supportive of or opposed to certain social causes and wish to be aligned with like-minded companies.
  3. Family influence may be strong, where the choices you make follow what your parents supported.

Speak with your advisor or relationship manager

If you are interested in investing in companies that make positive contributions to society or the community, or those that contribute to fighting climate change, reach out to your advisor or relationship manager.

They can help you explore funds that work for your long-term investing goals while living up to their sustainability mandates.

 


1 www.morningstar.com/content/dam/marketing/shared/pdfs/Research/Global _ESG_Q4_2020_Flows.pdf

2 www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum

3 www.iosco.org/library/pubdocs/pdf/IOSCOPD679.pdf

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