Industry Voice: Green is not always clean - Rising tide of greenwash brings risks for investors

clock • 6 min read
Industry Voice: Green is not always clean - Rising tide of greenwash brings risks for investors

The term "greenwashing" was coined in 1986 by American environmentalist Jay Westerveld, after a visit to a tropical resort. The hotel left notes in guest rooms asking them to "help us help the environment" by re-using towels, even as it was building new tourist bungalows over threatened coral reefs.[i]

Greenwashing comes in a variety of shades. In 2010, the consultancy TerraChoice conducted a study of US retail companies, identifying "seven deadly sins" of green marketing. These included a lack of evidence for green claims; vagueness; irrelevance; outright lies; exaggerations; hidden trade-offs; and the "lesser of two evils" argument, which sees companies argue for the environmental benefits of fundamentally polluting products, such as cigarettes or crude oil.[ii]

More recently, researchers have identified a separate category, "executional greenwashing", whereby companies market themselves with nature-related colours and imagery to evoke an "ecological" impression.

One reason for the persistence of greenwashing is that companies have spotted a commercial opportunity amid rising awareness of environmental, social and governance (ESG) issues among consumers.

It all comes out in the corporate greenwash?

But greenwashing is risky; companies (and governments) making false claims may find themselves subject to legal action from consumer-rights organisations or other groups.

New regulation could make greenwashing more difficult. The European Commission is set to introduce rules to police green marketing on consumer-protection grounds as part of its 2020 Circular Economy Action Plan.[iii] Meanwhile, the US Securities and Exchange Commission (SEC) has stepped up its efforts to combat greenwashing under the new Biden administration.[iv]

While regulation to clamp down on greenwashing is welcome, asset managers have a key role to play in fighting back against the practice. Asset managers have an obvious incentive to ensure the companies they invest in are backing up their green claims. Greenwashing can result in reputational damage, regulatory fines and a sizeable impact on an investee company's share price. From a due diligence perspective, there is no substitute for engaging directly with company executives to determine their commitment to sustainability.

Blatant greenwashing, however, is relatively rare. More often, companies will pledge their commitment to the green transition while lobbying against new climate regulation behind the scenes.

In another, more subtle, form of greenwashing, companies may present themselves as supportive of the green transition while failing to look into their links to polluting activities further down the supply chain. At issue here are the "Scope 3" emissions associated with companies' customers and suppliers.

A recent report from Oliver Wyman shows that while around 95 per cent of European corporate lending comes from banks claiming to be committed to the Paris Agreement, less than ten per cent of European companies have Paris-aligned targets. Given that over 70 per cent of credit flow in Europe goes through banks, there might be substantially more climate risk in the system than is commonly assumed.[v] This may also be the case in the fast-growing sustainable bonds market.

Fixing finance

The rise in interest in responsible investment has led to concerns that some asset management firms are branding themselves as sustainable investors without doing the necessary legwork to ensure their portfolios are ESG friendly.

Regulators are beginning to take a closer look. The Sustainable Finance Disclosure Regulation (SFDR), which came into force in the EU in March 2021, imposes tougher requirements on the classification of investment products. Under the new rules, funds are effectively categorised as ‘sustainable' if they have binding sustainability controls in their investment process, or ‘neutral' if they don't. In addition, all asset managers are required to take sustainability risks into account and explain to investors how these are being managed. The idea is to integrate sustainability into all decisions, regardless of whether the investment product is branded with an ESG tag.

The aim - to promote clarity and transparency as to sustainability claims - is admirable. But there have also been some criticisms. Most notably, SFDR is inconsistent with the EU Taxonomy, the European Union's classification system for green investments. With further regulation in the offing - the UK's Financial Conduct Authority is developing its own sustainable finance proposals that it says will "at least match the ambition of the EU", with a focus on TCFD disclosure - it is to be hoped that sustainability reporting requirements will gradually become more aligned.

While more needs to be done to tackle greenwashing, these are steps in the right direction and asset managers should benefit from regulators' moves to increase transparency and expose climate risk. The fightback against greenwashing has begun in earnest.


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[i] Bruce Watson, ‘The troubling evolution of corporate greenwashing', The Guardian, August 20, 2016.

[ii] ‘Sins of greenwashing,' UL.

[iii] ‘Initiative on substantiating green claims', European Commission, 2020.

[iv] ‘SEC announces enforcement task force focused on climate and ESG issues', US Securities and Exchange Commission, March 4, 2021.

[v] ‘Running hot: accelerating Europe's path to Paris', CDP and Oliver Wyman, 2021.


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