Recent years have seen more capital than ever flowing into sustainable investing. At the same time, concerns are rising that a deceptive practice called “greenwashing” could be obscuring the real impact a given investment has—and damaging the industry’s credibility.
What Is Greenwashing?
Greenwashing is when an organization makes misleading claims about the environmental benefits of its products or the way it operates. The broader term “impact washing” further encompasses similarly exaggerated claims about an investment’s social impact. For the worlds of sustainable, impact, or environmental, social, and governance (ESG) investing, the issue is of particular urgency, since it means investors’ capital might not have the intended benefits or might face unexpected risks, while other worthy investments may go unfunded.
“Clients are concerned about being hoodwinked and, on the fund manager side, there are also concerns this is going to end up discrediting efforts that are genuinely being made,” Catherine Howarth, CEO of responsible investment campaign organization ShareAction, told the Financial Times.
Ironically, it is the success of sustainable investing that has turned this practice into a growing concern: the greater the demand, the greater the temptation to use sustainability as a marketing strategy. Muddying the waters is a lack of universal standards for just what “sustainable investing” is. Pensions & Investments reports that there are more than 150 providers of research, rankings, and other labeling aimed at assessing whether an investment can be considered sustainable. This inconsistency makes it difficult for investors to verify a fund’s real environmental or social impact.
Several organizations became alarmed at the growing impact washing trends, so they mobilized to create new investing frameworks. For example, the CFA Institute initiated an effort to define the scope and requirements for an ESG industry taxonomy and standard under the supervision of the Global Industry Standards (GIS) Steering Committee. In April 2019, 60 global investors launched the Operating Principles for Impact Management.
Beyond these frameworks, investors can take steps to safegaurd against greenwashing. One is to determine whether their advisers have a track record of ESG or impact investing predating the boom. Another is to ensure that they assess the underlying use of securities to understand how the environment or society is benefiting from their investments. In addition, investors can find out whether their advisers’ own work environments and other firm practices are consistent with ESG principles.