ESG greenwashing happens when an investment product (such as a mutual fund or ETF) is either intentionally or inadvertently marketed in a misleading way — that could include inaccurate descriptions of a fund’s ESG attributes. Find out what to watch for.
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As a consumer, you may be familiar with the term greenwashing. Typically, it refers to the practice of labelling products as environmentally friendly when that claim may be hard to verify or even untrue.
For ESG investing, greenwashing extends beyond environmental claims. While ESG investors can be motivated by environmental concerns, they may also be focused on social and governance issues.
ESG greenwashing happens when an investment product (such as a mutual fund or ETF) is either intentionally or inadvertently marketed in a misleading way — that could include inaccurate descriptions of a fund’s ESG attributes. This is also a risk when directly investing in a company, as some companies may not accurately describe their ESG-related practices, policies or outcomes.
What does greenwashing look like?
There are many ways greenwashing in ESG investing can happen, including:
Misleading advertising and information
A company may have advertisements or a website that suggest a fund is focused on ESG when it is not. Some products are named to sound like an ESG product but do not actually have any ESG elements.
There are companies that exaggerate the impact of their ESG activities. Sometimes, only part of a company’s operations adheres to its ESG claims. For example, a fossil-fuel free company may not use fossil fuels in its operations, but it might import parts from another company that uses fossil fuels.
Public ESG commitments without follow-through
When a company or asset manager makes ESG commitments in the media but fails to demonstrate progress towards those commitments on an ongoing basis. This could be either inadvertent or intentional.
All investments are marketed and described in some way. It is important to be aware of greenwashing when selecting ESG investments. It will help you ask the right questions when adding these investments to your portfolio.
What do you need to know about greenwashing as a retail investor?
There are different ways greenwashing can happen in the investing world. And, unfortunately, it is not always possible for investors to know it is taking place. However, there are steps you can take to better understand your ESG investments.
4 steps to better understand ESG mutual funds and ETFs:
1. Identify your ESG goals or desired outcomes
There are many types of ESG funds with different focuses and strategies. Knowing what ESG goals you hope to achieve by investing can help you find funds that meet these goals or investment outcomes.
2. Check the fund’s objectives
When you read the prospectus of an ESG fund, you should see its ESG focus included in the investment objectives. For example, that focus could be on reducing greenhouse gas emissions, or improving/demonstrating board diversity of the companies included in the fund.
3. Check the fund’s investment strategies
An investment fund must disclose the investment strategies used to achieve its investment objectives in its prospectus. This includes describing the type(s) of strategies used to achieve ESG targets (for example, negative screening or positive screening) and the industries or companies the fund focusses on.
4. Ask your advisor for more information
Once you’ve determined your ESG investing goals, or desired outcomes, it’s a good idea to include this in conversations with a financial advisor, if you have one. They can help you identify funds to help you meet your goals. And they can provide you with more information about the funds that you’re interested in and the fund’s investment objectives and strategies.
There are also considerations for investors who invest directly with a company (rather than through a fund).
Any investment choice, ESG-related or otherwise, should be a good fit for your level of risk tolerance, investment time horizon, and investing personality.
3 considerations for investing in companies for ESG reasons
1. Evidence to Substantiate ESG Claims
Consider what evidence the company uses to support its ESG claims. For example, if a company has committed to net zero emissions, has it disclosed how it plans to achieve this? Also consider if well-recognized data collection methods are being used, such as the GHG Protocol for GHG emissions information.
2. Limitations of Evidence or Data
ESG information is an evolving area. In certain contexts, there are limitations when it comes to collecting data. Consider whether a company has disclosed the limitations of the data and its ESG performance.
3. Cherry Picking
Is the company emphasizing certain kinds of ESG information and downplaying others? Consider whether the information provided by a company provides the full ESG picture or if there are gaps in the disclosure.
Learn more about Understanding Fund Facts, the documents which summarize key information about mutual funds you’ve purchased. And check out ETF facts: interactive sample.
