ESG investing faces “greenwashing” criticism, but it could be a good thing for the sector

Published on July 8, 2022 by Blackstone

ESG investing, which considers environmental, social, and governance factors, has faced some criticism in recent months over “greenwashing”. While scepticism is on the rise, recent events could help improve transparency in the sector.

ESG investing involves considering non-financial factors when making investment decisions. This may mean choosing companies that are taking steps to reduce carbon emissions or have strong human rights policies. These ESG issues are reviewed alongside things like company performance and investment risk.

If you’re interested in investing with ESG issues in mind, you can find a huge range of options that may be labelled with terms like “green”, “responsible”, or “sustainable”.

However, weighing up how much good these investments are doing can be difficult and it’s important to note that ESG criteria can vary significantly between different investors.

There’s also a risk of greenwashing. This is where an organisation makes an unsubstantiated or exaggerated claim about how environmentally friendly its products or services are. From an investment perspective, it can mean investments don’t have the positive effect intended.

According to Triodos Bank, 26% of consumers that don’t invest in an ethical fund question whether these options are truly ethical.

How Tesla and Deutsche Bank cases have led to ESG criticism

There are many examples of companies greenwashing or funds not living up to the expectations of ESG investors. Recently, the cases of Tesla and Deutsche Bank have led to debates about what ESG means and if it’s as effective as investors would like.

Tesla was dropped from an ESG stock index

Electric vehicle maker Tesla made headlines when it was dropped by major stock index, the S&P 500 ESG Index. While Tesla rated well on many environmental factors, issues around social and governance meant it was removed from this list.

What caused controversy was that the index continued to include oil and gas company Exxon Mobil. The news led to Tesla CEO Elon Musk labelling the ratings a “scam”.

There are several reasons why this happened, including some ESG criteria taking a “best in class” approach to rating firms. So, while Exxon Mobil contributes significantly to climate change, compared to its peers it’s performing well on ESG criteria.

Deutsche Bank faces a greenwashing investigation

Investment banking company Deutsche Bank was raided by German law enforcement on suspicion of fraudulent advertising of sustainable funds at its DWS unit. A former employee alleged that the business engaged in greenwashing.

While the investigation is ongoing, the case raises some questions about how funds and investments are labelled to entice investors, and the evidence used to rate firms against ESG criteria.

Could these cases have a positive effect on the ESG industry?

While cases such as Tesla and Deutsche Bank could harm investors’ perception of ESG investing, they could also help drive the industry forward.

There have been calls for standardised reporting and greater transparency for both companies and funds in the sector. Such high-profile cases could be a catalyst for positive change, with investors now more likely to scrutinise the ESG investments they hold.

At the moment, businesses and funds have very different criteria or ways of communicating, so it can be difficult to compare different investment opportunities against ESG factors.

However, greater transparency means ESG investors can have more confidence that the options they choose more closely align with their goals.

3 ways you can spot greenwashing when investing

1. Look beyond the buzzwords

Many companies that want to appeal to ESG investors will use buzzwords to catch your attention. While phrases like “sustainable” or “eco-conscious” may make it seem as though these investments are right for you, you need to look beyond the label.

How is “sustainable” defined? If you’re investing through a fund, you can view the criteria used to assess if a company is appropriate. Just because a fund describes itself as “green”, don’t assume it’s only investing in companies that are having a positive effect on the environment.

2. Question vague statements

When you’re looking at how companies operate, you’re likely to come across vague statements. For example, they may say they’re “working towards carbon-neutral operations”. However, without a time frame or a clear plan to achieve this, it means little.

Once again, you need to dig a little deeper to discover if their operations align with your values.

3. Work with a finance professional

Understanding the value of ESG investments requires a lot of research and it can be time-consuming. If you don’t have the time or inclination to do that, but still want to make ESG issues part of your portfolio, a finance professional can help you.

If you’d like to discuss incorporating ESG factors into your investment decisions, please contact us. We’ll help you create a portfolio that not only reflects your values but your personal goals too.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.