3 useful tips to avoid “greenwashing” when searching for sustainable and ESG investments

In recent years, there has been a significant increase in the number of people who want to align their investments with their moral and personal beliefs. As a result, “ESG” investing, which considers a variety of environmental, social and governance issues when making decisions, has become much more popular.

However, while this new focus on sustainability and ESG investing are a welcome change, there are some potential issues. One of the biggest challenges that ESG investors have to face is the phenomenon of “greenwashing”. This is essentially when an investment company enhances their claims of “green” credentials without a reasonable foundation. The European Commission definition of greenwashing is “Companies giving a false impression of their environmental impact or benefits. Greenwashing misleads market actors and does not give due advantage to those companies that are making the effort to green their products and activities. It ultimately leads to a less green economy.”

If you’re interested in growing your wealth in a sustainable way that helps to potentially make the world a better place, it’s important to be able to spot when an investment company is greenwashing. In a moment, read about the three simple ways to help you avoid this, but first, a reminder on what sustainable and ESG investing is.

Sustainable and ESG investing has grown significantly in popularity in recent years

As you may know, ESG stands for “Environmental, Social, and Governance”. These are the three criteria that investors hold companies to in the hope of fighting negligent business practices.

Environmental

This criterion mostly deals with issues such as conservation and pollution, which may be exemplified by a company’s energy efficiency or carbon footprint.

Social

This category looks at the relationship between the business and the wider community and other stakeholders. For example, it may focus on working conditions for the employees and customer satisfaction.

Governance

This criterion assesses the standards by which companies are run. It may consider board structure, gender equality in management or the pay of company executives, for example.

On the face of it, investing according to these principles can seem like a good idea. Recently, many investors agree: according to data published by FT Adviser, inflows into sustainable and ESG funds rose from £4 billion in the second quarter of 2020 to more than £6 billion in the same quarter of 2021.

The reason for this increase becomes more apparent when you look at some of the market data. As we discussed in a previous article about how ESG investments performed during the pandemic, many sustainable funds saw strong growth during this time.

However, in recent months, some critics have pointed out that investment companies can somewhat easily enhance their “green” credentials.

The phenomenon of greenwashing can make it difficult to make clear and informed decisions

The issue of greenwashing is one that seriously threatens the image and goodwill surrounding sustainable and ESG investing. Essentially, this problem is when investment companies attempt to make their fund offerings appear more sustainable than they really are.

As you might imagine, this can muddy the waters and make it difficult to make a clear decision. The lack of common terminology used can also make the task more nuanced.

An example of this is claiming to offer an investment that seeks to lead the transition to non-fossil fuel and renewable energy however, some of the underlying holdings have little revenue applicable to these newer technologies or they remain invested in industries that have high greenhouse emissions with no real realistic prosect of meaningful future positive change.

The issue of greenwashing also presents a problem for financial advisers, as they risk reputational damage if they recommend sustainable investments which turn out not to be. According to a study published by FTAdviser, 69% of respondents were concerned about this risk.

3 simple tips to help you avoid greenwashing when choosing investments

If you want to invest in companies according to ESG principles, it’s important to take steps to avoid the companies that are enhancing their sustainable credentials. To do this, here are three tips on how to help you spot greenwashing:

1. Know what your values are

If you want to invest according to ESG principles, one of the most important steps is to know what criteria you want to prioritise. Once you know what your values are for a sustainable company, it can be easier to filter out the businesses that don’t meet them.

For example, you may be passionate about tackling global climate change and want your investments to reflect that. If so, then you’ll be able to have a better idea of what standards companies need to meet in order to be a suitable candidate.

For example, if a business claims to be taking steps to reduce its carbon footprint but is elusive about the details of how they are doing so, they may be trying to appear greener than they really are. Therefore, try to understand what external independent verification is available to audit their claims.

2. Do your initial reading to educate yourself

Once you’ve decided what your personal beliefs are for a sustainable company, and perhaps already have some businesses and sectors in mind, it may be useful to become better informed by doing some initial reading. Thankfully, the internet can make this task simpler and easier than ever.

Even doing a quick Google search can often give you an indication as to whether a company is as green as it seems. For example, you may be able to find out more about their working conditions or environmental impact. Or, you could find out the opinions of external bodies specialising in these areas.

You may also want to be wary of phrases like “eco”, “sustainable”, and “green”, as these can sometimes be used by companies who want to appear more environmentally conscious than they really are. If you see a business using them, it’s important to verify that they are actually practising what they preach.

One useful resource can also be the Advertising Standards Agency’s website, which can help you to see if a company have been penalised in the past for making false claims about their green credentials.

3. Seek professional advice

If you want to invest according to sustainable and ESG principles, it can be easy to worry about whether it’s right for you. This is why, if you’re concerned about issues such as greenwashing, you may want to consider seeking professional advice.

Working with a financial planner can help to give you a greater sense of confidence when investing. You can rest assured that not only will you be able to reach your goals, but you’ll do so in a sustainable way too.

Get in touch

When it comes to investing, seeking professional advice can help you to make a properly informed decision. That’s why, if you’re interested in aligning your money with your morals, we can help.

Please email us at advise-me@fosterdenovo.com or call us on 0330 332 7866 to speak to one of our team.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Important information 

Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the money they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.

FD Sustainable Dynamic Portfolios are investment portfolios provided by FD Dynamic Portfolios Limited (FDDPL) which is an appointed representative of Foster Denovo Limited (FRN 462728), and is authorised and regulated by the Financial Conduct Authority (FCA). FDDPL has issued this document in its capacity as investment adviser to the investment manager, AB Investment Solutions Limited (FRN 705062), which is authorised and regulated by the Financial Conduct Authority (FCA).

Sources: https://www.ftadviser.com/investments/2021/10/25/the-only-way-is-esg/?page=3

https://www.ftadviser.com/investments/2021/11/15/how-to-tackle-greenwashing/

https://www.asa.org.uk/

https://ec.europa.eu/environment/eussd/smgp/initiative_on_green_claims.htm