Three European pension funds share their views on greenwashing and discuss what to do about it
Greenwashing is a popularly accepted definition of a marketing exercise used to persuade consumers that certain products and services are more environmentally friendly than they actually might be.
The financial services industry is no exception. As the scrutiny on sustainable ownership and ESG rightly increases, organisations that greenwash will choose to highlight only a select few environmentally friendly aspects of the product or service, while lacking standardisation and rigour on the analysis or metrics associated with them.
As new aspects in sustainable/ESG investing come into focus, different methodologies, frameworks, ratings analysis, data and scenario analysis providers will emerge. Until things are regulated or legislated in full, these developments run in tandem from a combination of private and public participants in the industry, which leads to higher potential for greenwashing.
As knowledge, awareness, standardisation of framework and methodologies and data quality and availability around these topics improve, the rigour and standardisation does as well. This reduces the potential for greenwashing as transparency will increase and consumers become more sophisticated.
The climate space is an example where data availability and quality along with frameworks and methodologies have been improving, especially in company-reported Scope 1 and 2 emissions data. While there is still a long way to go on various other aspects of climate reporting, this provides some early signs of how standardised and regulated methodologies can serve to make greenwashing less widespread in the longer term.
Greenwashing is a risk we must identify and tackle as it is disingenuous. It is a matter of creating, adhering to and articulating clear and concise standards, metrics and data requirements in assessment of investments.
Engagement and a shared understanding is key to this. Therefore, the first port of call for us is to ensure that both internally and externally managed investments adhere to clear standards, metrics and data reporting along with an articulation of standard industry taxonomies used, clarity on whether data and metrics are company-reported versus estimated by third-party providers.
Ensuring sustainable investments adhere to these will serve to clearly highlight areas where further discussions are needed both with internal and external managers on potential greenwashing.
We see greenwashing as an overstatement of the sustainability credentials of a strategy or manager, but it can also be identified as a tendency to reduce the complexities of sustainable investing.
As a practical example, many of the green products that have been launched in recent years, both in the retail and institutional space, tend to focus on the technology sector. This can be problematic, because technology companies are not immune from ESG issues. As a result, these products sometimes disregard important aspects such as human rights, data safety or privacy issues.
In the renewable-energy sector, there can be issues with the location where technology components are produced. Generally speaking, the greening of the economy implies a greater use of certain kinds of minerals and the sourcing of such minerals matters.
The introduction of disclosure regulations in the EU, including SFDR and the green taxonomy, could potentially exacerbate the problem. While it is absolutely necessary to reach a common understanding of what ‘green’ and ‘sustainable’ means, the way the regulations were introduced was a bit rushed.
Asset owners and asset managers have been left with some degree of uncertainty when interpreting the meaning and practical implications of the EU rules, particularly articles 8 and 9. A great share of the data that is necessary to classify products is yet to be collected and this can have unintended consequences. Asset managers have to attract capital and the process of classifying products could be influenced by that factor.
Transparency has improved
In my view, greenwashing means giving a false impression or providing misleading information about the sustainability of an investment strategy. We see two types of greenwashing – conscious and unconscious. Unfortunately, we experience a lot of unconscious greenwashing when investors or managers believe they are aligning their portfolio towards net zero, for instance, but are taking insufficient action.
When we select a manager, we want them to implement ESG criteria within the investment strategy in a way that goes beyond just excluding a few stocks from the investment universe. But we also want the manager to engage with corporates. This makes ESG investing more of an art than a science, in the sense that it requires a careful combination of engagement with the management of the universe in terms of carbon emissions.
When we started to engage with our managers on their ESG credentials, we found that only a few of them were taking account of their investors’ voting preferences. We are not necessarily telling them what they should vote at AGMs, but we need them to carefully consider our preferences.
Thankfully, that generally does not happen and we do not come across serious instances of greenwashing very often. I am pleased to say that the industry is evolving in the right direction. ESG investing has become mainstream and is being integrated in most investment strategies.
Interviews by Carlo Svaluto Moreolo