It is almost impossible to talk about ESG (‘Environmental, Social, and Governance”) investing without talking about the issue of greenwashing.
Greenwashing is giving the appearance (or stating that you have the qualities) of being either climate-friendly, sustainable, or adhering to the principles of ESG without substantiation. It can include highlighting positive (true) information while minimizing (also true) negative information. Charges of greenwashing have been leveled against individual corporations and investment companies. The risk of investing in something that promises to be green but actually is not helping as much as hoped is often cited as a reason to not bother with ESG investing.
How do you avoid greenwashing when selecting investments or green companies?
First, most companies that are promoting themselves for having an ESG or sustainable angle will have compelling green marketing. Picture green forests or windmills over amber waves of grain. You have to digger deeper than this, or the name of the fund or investment, to know whether your investment is truly avoiding bad actors.
You can access some types of third party research to help you evaluate what is going on “under the hood.” Some notable services are ESG Pro and YourStake.
Second, this may be an area where regulators will increasingly be on the case. In April 2021, the SEC sent out a risk alert (without taking a position on the merits of ESG investing as a strategy), stating that any company or manager who markets products as having ESG qualities would have to be accountable and transparent as to their processes and policies. European regulators have already set standards and stiff penalties for investment advice in this area.
Lastly, some apparent greenwashing may be partially due to some companies moving more slowly than the apparent demand for ESG investment products and services. Jon Hale, the head of ESG research at Morningstar, estimates that 80% of funds in their database that mention sustainability in their charter have an either 4 or 5 Morningstar globe rating for sustainability (the 2 highest ratings). He feels that this is evidence that, on the whole, greenwashing may exist but is not pervasive. While some companies may be misrepresenting their ESG credentials, some other companies may be a “work in progress” or “catching up” to their marketing intent.
How do we see ESG at Arthur Stein Financial? We have found alternatives to our preferred traditional investments in US stock funds that offer similar metrics in key areas but have stated Environmental, Social and or Governance goals. Compared to a standard U.S. equity portfolio, our ESG portfolio has fewer deforestation producers, fewer fossil fuel products, more clean energy companies, and stronger climate commitments, according to a report from YourStake.Org. While e have done our best to select investments that avoid greenwashing, it will never be completely clear if we were successful.