How To Avoid Greenwashing in Your Portfolio
By Nicole Young on April 13, 2022
With sustainable investments recently exceeding $35 trillion,1 the number of funds labeled “green,” “low carbon” and “eco-friendly” has soared. But do these funds live up to their labels?
Not always, according to new research. Among the 593 funds recently analyzed by climate think-tank InfluenceMap, 421 had portfolios that were not aligned with the Paris Agreement climate targets. In addition, 72 of 130 funds labeled as “climate-themed” were not in line with Paris goals.2 Other research and case studies indicate greenwashing remains a prevalent problem in sustainable investing, largely due to the absence of regulation and clearly defined standards.3
If you’re interested in sustainable investments, however, there are ways to reduce your risk of investing in greenwashed funds. Consider these five steps.
Step 1: Think through your personal values and goals.
Before you look at any funds, decide what you want to get out of sustainable investing. Ask yourself: Why do I want to invest sustainably? What issues do I care most about? Which ESG metrics are most important to me? Are there certain industries I want to support? Are there industries I want to avoid? Clarifying these goals and values will make it easier for you to compare and select funds with your financial advisor.
Step 2: Know your preferences on positive vs. negative screens.
Different funds will either include (positive screen) or exclude (negative screen) companies based on specific criteria. A fund that uses a positive screen might, for instance, include only companies that directly have a positive impact on the environment. By contrast, a fund that uses a negative screen might simply exclude companies that have a negative social or environmental impact. Again, knowing your preferences on these approaches may help you identify the right investment opportunities.
Step 3: Review the fund’s objective — not just its name.
In some cases, a fund’s name or theme has less to do with its goals and more to do with its marketing. For example, a climate-themed fund might only invest in companies that intend to be green, without necessarily investing in companies that are already low-carbon. To avoid being misled, review the fund’s ESG characteristics and specific objectives with your advisor. Objectives can vary widely: One fund might invest only in companies with good ESG credentials, whereas another fund might merely invest in companies doing less harm to the planet compared to industry peers.
Step 4: Invest in products that have been vetted by professionals with the time and tools needed to identify greenwashing.
To spot instances of greenwashing, company-level analysis is often needed. For example, UL, a U.S.-based global safety certification company, has identified “seven sins” that companies may commit.4These include hiding tradeoffs; failing to prove an environmental claim; making poorly defined claims; using fake labels or false endorsements; making irrelevant claims; belonging to a category that is environmentally harmful; or making false environmental claims. As an individual investor, you likely do not have the time and research methods needed to analyze companies across all these facets. As such, lean on your financial advisor, who can help you narrow down the universe of investment choices to those that have undergone professional due diligence with an eye toward weeding out greenwashing.
Step 5: Take a closer look at funds with your advisor.
Ask your financial advisor to walk you through the investment philosophy and approach for any recommended funds. You may even want to review the fund’s holdings at the company level, especially given the somewhat subjective nature of sustainability. When you see the companies listed, you may identify a break from your values that you had not previously considered.
The good news is, a clampdown on greenwashing is coming, as regulators are working on new standards for sustainable investing. Until those standards are available, however, it’s a good idea to continue to do your due diligence. After all, the more we reduce greenwashing, the more we increase resources allocated toward making a positive impact.
1 Global Sustainable Investment Alliance. “Global Sustainable Investment Review 2020.” http://www.gsi-alliance.org/. Accessed March 29, 2022.
2 InfluenceMap. “The Truth About ‘Climate’ Funds – Most are Misaligned with the Paris Agreement.” https://influencemap.org/pressrelease/The-truth-about-climate-funds-most-are-misaligned-with-the-Paris-Agreement-ee40c9b124666a5bee363fea134e3c37. Accessed March 29, 2022.
3 For example, see: Fletcher, Laura and Oliver, Joshua. “Green investing: the risk of a new mis-selling scandal.” Financial Times, February 19, 2022, https://www.ft.com/content/ae78c05a-0481-4774-8f9b-d3f02e4f2c6f. Accessed March 29, 2022.
4 UL. “Sins of Greenwashing.” https://www.ul.com/insights/sins-greenwashing. Accessed March 29, 2022.