Coined back in the 1980s, “greenwashing” is a term referring to companies claiming to be eco-conscious—so as to impress buyers—but not really being so. An example would be where a company claims to sell organic cotton clothing, sourced sustainably but, in reality, uses fabrics combined with synthetic materials – that’s right, they are greenwashing you.
We will all recall that back in 2015, Volkswagen was caught for cheating consumers with its supposedly “clean diesel” engines. VW had their engineers fit 11 million cars with software that duped emission tests into believing that the car was eco-friendly. In reality, the cars were releasing up to 40 times the permitted amount of nitrogen oxide pollutants.
Deutsche Bank AG’s asset-management arm, DWS Group, is under investigation by the US Securities and Exchange Commission, and federal prosecutors for allegedly overstating its Environmental, Social, Governance (ESG) credentials across its $1tn fund range, according to reports. A whistleblower in an interview with The Wall Street Journal claimed that the company had overstated how much it used sustainable investing criteria to manage its assets.
We are very aware of the challenges businesses are facing around supply in 2022, but this may well be one of the reasons that “Greenwashing” is taking place in financial services, with bold claims from asset managers on where and how they are investing to save the planet. But in fact, what they are doing is trying to keep up with the rapidly increasing demand for ESG investing as it hits the mainstream. This is not an argument to say that this is right, but it is a by-product of change in consumer behavior as in the rush to meet demand for ESG and sustainable investment products, accusations of greenwashing have become commonplace and global regulators have been looking into how to ensure that investors are not misled.
There is however reason to be weirdly optimistic about greenwashing, and it is very much to do with the huge demand. Unsurprisingly, allocations to ESG investment products have boomed in recent years and 2021 was no exception. According to Morningstar, global ESG assets grew to $2.74 trillion as of December 2021. Year-on-year, the global sustainable fund universe expanded by 53%. It’s the opposite of the commercial model “build it and they will come” – “demand it, and they will build it”.
Whilst there are undoubtedly many fund managers and institutions that are genuinely seeking to build funds with robust ESG credentials, there are plenty more that seek simply not to miss the boat as the market moves away from traditional investment strongholds. It’s not right, but the temporary competitive defense of some areas of the market is to exaggerate ESG claims (which in itself is in fact otherwise known as lying and is very un-ESG). However, in seeking to cloak funds in green, the momentum for change is building, and there is hope this can lead to positive development, as it may well be the journey that over time will bring ESG investing to a better place. The bad players will be weeded out of the market, the definitions and framework will become clearer and consumers will become better educated. The solution of improved transparent quality supply of ESG investing will eventually arrive.
Just in case……..greenwashing is not a good thing.