As ESG investing becomes increasingly popular, so does a malicious practice called ESG investing greenwashing. It is the act of presenting exaggerated or false credentials proving the environmental impact of a given investment. In this article, we examine this phenomenon more closely, looking at its reasons, potential risks, and ways to avoid them. We invite you to read on.
What Does Greenwashing Mean in Sustainable Investing?
Greenwashing investments refers to the practice of presenting false information regarding the environmental friendliness of given assets and practices. Unfortunately, this practice is becoming more common due to higher interest in ESG investments. We have already observed some immense examples of greenwashing, as was the case with cryptocurrencies.
Here, the case was straightforward: cryptocurrency miners have often claimed their operations are environmentally friendly. However, studies reveal that they were not; the sheer amount of electricity needed to mine cryptocurrencies generated vast amounts of carbon dioxide.
This is but a simple example of a situation where it was possible to detect fraud easily. Yet, it is not that easy with other investments, which leads to the risk of falling for unsustainable assets that claim to meet the ESG considerations (or ones that are eco-friendly but not to such an extent as presented).
Why Is Greenwashing in ESG Investments a Problem?
Knowing what greenwashing means in sustainable investing, you might wonder why it is such a big problem. After all, isn’t it possible to conduct thorough research and avoid getting scammed? Or aren’t there any regulatory requirements to deem an investment sustainable? Unfortunately, no. Let’s look at all the main reasons why greenwashing is still a major problem.
Lack of Common Standards
Firstly, there is no single, common framework for defining whether an investment is sustainable or not. This means that, technically, anyone can claim that they meet the ESG considerations.
On the other hand, you have many resources that enable you to verify businesses you wish to invest in, yet… they are also unreliable. Most of such rankings are self-reported, and the metrics vary between them, so there is no single way to determine whether the business meets your or your client’s standards.
Greenwashing Investments Is Easy
The second problem was already depicted in our cryptocurrency example—it’s extremely easy to claim that your business is sustainable. However, it is often much more difficult to uncover that it is not.
For instance, a company may claim to be on track to reduce their carbon emissions to net 0. However, the truth is that there is no plan in place to do so. How do you verify that in advance?
Many businesses purposely promote a specific, sustainable element of their operations to draw attention away from other areas that aren’t eco-friendly. It is easy to get misled here.
ESG Investments Are on Demand
Finally, ESG greenwashing is common due to the popularity of sustainable investing. With more investors opting for environmentally responsible assets and a limited supply, it’s easier to get somebody to invest in a greenwashed business without sufficient research.
The Risks of Investing in Greenwashed Assets
What risks are associated with making the wrong moves as a wealth manager—investing in greenwashed assets? The problem is significant, as the main risks include:
- Losing your client's trust—if an investment proves not to be sustainable, your clients might lose their trust in you, believing that you should’ve done more research.
- Misplaced investments—ESG investments are often more profitable (and secure); thus, mislabelling a non-sustainable opportunity as an eco-friendly one might lead to losing money (or at least achieving a lower return).
This is why detecting and avoiding ESG investing greenwashing is crucial for service quality and customer relationships.
How to Dodge ESG Investment Greenwashing?
So, how do you avoid the risk and dodge greenwashed investments? We’ve prepared 3 tips that will help you with that.
Research
Do more thorough research on the businesses you plan to invest in and the most common greenwashing tactics. This way, you’ll be able to spot red flags and react in advance. Such tactics include:
- misleading fund names,
- selective data picking,
- ambiguous claims,
- overemphasis on certain environmental impacts,
- lack of transparency,
- hidden trade-offs,
- dubious certification,
- insincere partnerships with NGOs.
Also, remember that sometimes it’s impossible to define whether an investment was greenwashed or sustainable due to insufficient data. In such cases, the decision should depend on, for instance, your client’s risk tolerance.
Follow the Available Guidelines
As we mentioned before, there is no single standardized framework that businesses can use to prove their sustainability—each will use different metrics. However, you can use one of the available systems to evaluate your potential investments.
Here, we recommend juxtaposing potential investments with the UN Sustainable Development Goals (SDGs). This complex framework prepared by the United Nations can act as a reference point for your research.
Invest in Reliable Technologies
Wealth management platforms, and other IT tools may come with modules that enable you to streamline your ESG investing. This way, you can evaluate potential opportunities more quickly and dodge potential greenwashing attempts.
For example, our WealthArc platform comes with an AI-powered risk management module that will alert you in case of any indications that an investment was greenwashed. This way, you will be better equipped to tackle the problem head-on, and your team won’t have to spend as much time verifying each investment opportunity.
The Takeaway
ESG investing greenwashing is a major issue right now, but with the right approach, you can avoid the risk and provide your clients with genuinely sustainable assets. Until a unified regulatory framework is built, we will see attempts at greenwashing, so there is no choice but to learn how it works and evaluate each investment opportunity.
You might also read: 3 Quality Data Characteristics That Ensure a Streamlined Decision-Making
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