Posted on: 08-11-2021 in Investments
With world leaders descending on Glasgow for the COP26 climate summit, one word has become synonymous with the event – greenwashing.
The word seems to pop up in most articles covering the summit, but what is greenwashing? While the term may sound like environmental jargon, it actually spills over in the investment world.
In this article, we look at greenwashing and the potential impact it can have on your investments.
At its core, greenwashing is misrepresentation, but let’s dive a little deeper.
The term isn’t new. In 1986, environmentalist Jay Westerveld wrote an essay focusing on the hotel industry. He noticed that rooms promoted reusing towels. The reason? To save the environment.
However, Westerveld realised that these hotels made minimal effort at best to reduce energy usage. If they did, savings made by the hotel would be passed onto the customer, but this wasn’t the case.
The hotels were not concerned about the environment; they were concerned about profit. Lower laundry costs meant bigger profits, with the environment used to mask the true intentions.
It’s a similar story with oil companies. They have policies in place that are considered green, but other actions are anything but green.
So, what is greenwashing? It’s a clever marketing spin that aims to make products, policies, or companies appear more environmentally conscious than they are.
At its best, greenwashing can contain misinformation that is ‘just true enough’. At its worst, it can contain information that is an outright lie.
Let’s look at how this ties in with investments.
The demand for green, or ESG investments, is increasing.
Research from Aviva found that the demand for ESG funds had increased due to the pandemic. Data from Natixis showed that by the end of the final quarter of 2020, ESG assets reached a record £1.2tn worldwide.
If you thought that demand for such funds was coming from younger generations, think again.
A separate report from One Planet Capital revealed that 77% of 18 to 55-year-olds said that ESG factors play a key role in their investment decisions. There was only a slight drop off in over 55s where it dropped to 71%.
Demand for sustainable investments is good news for the planet. However, with the rise in demand comes the increase in greenwashing.
In the past, investors had to make a choice; profits or protect the planet. However, that is no longer the case.
For the last five years, the FTSE4Good, an index for ESG stocks, has consistently tracked or outperformed the FTSE100.
Despite investors now being able to align their investments with their values and see good returns, there are concerns.
A study by Schroders found that greenwashing is the biggest concern for investors.
In 2021, 59% of investors stated greenwashing as their primary concern, compared to only 38% who listed performance as the biggest worry.
It’s easy to see why greenwashing is a top concern, as some funds can become polluted by companies looking to cash in on the growing popularity of ESG funds.
For example, a company could have certain policies such as using environmentally friendly materials but then use less than ethical processes to manufacture their product. Ultimately, this ends up creating distrust for investors.
All of this has made ethical investing a tricky task. Still, there are steps you can take to ensure your investments are aligned with your values.
Eventually, we will reach a point where industry-wide standards are implemented. This will give investors the transparency needed to make informed decisions.
That could be a way off, so what can you do in the meantime?
Unfortunately, doing more work may be the trade-off for now.
It’s easy for companies to use keywords such as ‘green’ or ‘sustainable’. Digging a little deeper into the company can help to determine any potential greenwashing.
Some ESG funds publish impact reports. These reports give a detailed breakdown of a company’s goals and statistics to show how they are making a difference.
Investing in a fund often means you’re investing in a group of companies. The fund’s prospectus will give you more information about the fund’s aims and the companies it invests in, so this is a good place to start.
You can usually find a prospectus with a simple Google search or by visiting the fund’s website. Doing this may mean extra leg work, but it will help you invest in companies that genuinely align with your values.
At the start of this article, we asked the question, ‘what is greenwashing?’.
The answer differs slightly depending on the context. However, for investors, it acts as a barrier. The lack of transparency can make it challenging to invest in companies that align with your values.
Regardless of how you choose to invest, having a robust strategy in place is essential.
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