How to spot greenwashing: More of us want to invest ethically… but firms and funds that appeal to our climate conscience aren’t always what they seem
- This week is Good Money Week with the investment world promoting ‘ethical’ options for those keen to do good with their money
- ESG investing has boomed this year, thanks in part to investors worried about climate change and spooked by the global pandemic
- Many funds and firms are committed to being green – but there is little in the way of comeback for those who claim these credentials and do nothing to deliver
The past six months has seen a surge in people wanting to make the economy greener, with a third of Britons stating the pandemic has sharpened their focus when it comes to the environment.
Asked what the Covid-19 outbreak had focused their minds on, 31 per cent said their pandemic experience has increased awareness of climate change, according to a Rathbone Greenbank Investment survey of 2,000 people.
A quarter also said they believed that investing in companies helping to combat climate change was now key to achieving a greener future.
However, the potential for ‘greenwash’ – where companies blind customers with unfounded and untrue claims of being environmentally aware – is huge.
Greenwash: It looks good on the label, but the contents are not as green as they first seem
There is no standard definition of ‘environmental’ or ‘green’ when it comes to companies and investing – though it is something that the Bank of England and Financial Conduct Authority are looking at.
There’s also no consequence facing companies or funds that claim to be green while pumping oil out of the ground.
Meanwhile, the green money movement continues to grow. Separate research from Bancroft Wealth showed the number of Google searches for ‘sustainable investing’ has grown 119 per cent since the onset of lockdown in March.
Keir Ashman, pensions and investments specialist at the wealth management firm, said: ‘The majority of our clients express an interest in making their investments work for the greater good, not just their personal gain.
‘This has been due, in part, to topical issues such as the positive environmental effect of lockdown, bad corporate behaviour during the pandemic, as well as worldwide social justice movements, but also because there is a greater desire to support purpose-driven organisations.’
Investment Association figures show that three months out of the past four with data available, saw investors pour more than £900million a month into responsible investments.
Companies are fully aware of the investment opportunity that slowing climate change offers – and this week, Good Money Week, is likely to see many of them set out their stalls in a bid to get their hands on your money.
If you feel strongly that you’d like to make your investments – and pension for that matter – a bit greener, there is now a big range of options available.
Whether they all fulfill their green promises, however, is less clear.
What is greenwash?
Greenwashing is a term that has been knocking around since the 1980s and you’ll almost certainly have been duped by it.
It refers to companies and individuals claiming to be environmentally conscientious to improve their public image while continuing to undermine efforts to reduce carbon emissions.
Big oil companies which invest into renewables, pointing to this as their green strategy, while diverting 95 per cent of their cash into new oil and gas extraction, is an obvious example.
So too are a number of big investment houses that have stated on the record they are switching their strategy to backing companies that will help reduce carbon emissions, while investing just 1 per cent of their overall fund into same.
Bruce Davis, of renewable energy group Abundance Investment, says: ‘The two big areas to watch here are those who use the ESG – environmental, social and governance – badge to imply they are an ‘ethical’ alternative to mainstream funds.
‘The reality is that fund rules require them to maintain a degree of diversification and liquidity which means they are invested in many companies that an ordinary investor would not consider green and excludes many of the investments in the green sector which are not companies listed on the world’s stock exchanges.
‘Instead they rely on the clout of their large shareholding to ‘influence’ companies.
‘The proof of the pudding is in their use of voting rights in AGMs. Do they censure companies that ignore the climate emergency?
‘For example BlackRock, the world’s biggest investor, made a big play of a letter to the companies it invests in, but has yet to show it will consistently back up words with action in shareholder votes connected to climate change.’
This is Money asked BlackRock to comment, and was pointed to the firm’s Investment Stewardship Annual Report published on 17 September.
This showed that their investment team have identified 244 companies they deem to be making ‘insufficient progress integrating climate risk into their business models or disclosures’.
They have also taken voting action at 53 companies for insufficient progress on climate, including voting against 55 directors at 49 companies.
Directors at 191 other companies have been put ‘on watch’ or at risk of voting action during the 2021 AGM season absent further progress.
The potential for ‘greenwash’ – where companies blind customers with unfounded and untrue claims of being environmentally aware – is huge
It’s not always transparent. Corporate public relations, investor relations and corporate social responsibility is big business and those running the show can see the value in claiming to care, without needing to deliver if they consider it not financially beneficial.
Rebecca O’Connor, of ethical money blog Good with Money, says: ‘Greenwash is a marketing technique, of making a product appear more eco-friendly than it really is.’
She adds: ‘Through the clever use of certain words, phrases or images, an audience believes the product is green.
‘In the case of finance and investment, this happens a lot. It’s usually asset management marketing departments that are to blame, though in fairness to them, they may also believe the funds are greener than they really are.
‘Banks are also often guilty of this. They use green colours and pictures of wind farms, when in reality, a tiny fraction of their overall lending portfolio goes to renewable energy.’
Many companies also use offers of offsetting, where they buy things which are ‘carbon negative’ to net off the carbon they generate by producing their product or service.
Davis says: ‘For example, Shell claims this for its fuels and many airlines offer (at an extra charge) customers the chance to offset.
‘However, the world of offsetting is neither transparent or regulated and in reality you may be making very little difference to the world’s carbon budget or net zero targets.
‘The best thing is to choose companies which are making real progress on removing carbon from their systems of production.’
Another technique is misdirection. In the jargon of greenwashing, there is something called ‘scope’ emissions.
‘This is the difference between Shell installing LED lights in its offices (reducing scope 1) to Shell making good on all the fuel that is burned in the cars who use its petrol and diesel (scope 3),’ explains Davis.
‘When people say they are reducing their emissions, you need to check where they draw the line on their corporate responsibility.’
A spokesman for Shell said: ‘We agree that action is needed now on climate change, so we fully support the Paris Agreement and the need for society to transition to a lower-carbon future.
‘We have already invested billions of dollars in a range of low-carbon technologies, from biofuels, hydrogen and wind power, to electric vehicle charging and smart energy storage solutions.’
Tips on how to spot greenwash
- Look for vague words, pretty pictures but no hard facts or concrete examples.
- Look for impressive numbers but without context. This is important. A big bank might have lent £200million to renewable energy and brag about this, but if that’s £100million of a total loan portfolio of £390billion and the rest of their energy loans are to fossil fuels, that’s not really a high enough percentage to claim credit.
- Always look under the bonnet. If you can’t even get under the bonnet, that’s your first warning sign that there is something to hide.
- If you manage to access the holdings of the fund, or the bank’s lending portfolio, and you don’t know what any of the companies do, you’ll still be none the wiser. Use a sustainability checker like CSR Hub to work out how sustainable these companies really are.
By Rebecca O’Connor, Good with Money
Why are firms allowed to greenwash?
It’s a tricky area to navigate – advertising standards in the UK are pretty strict and companies are frequently reprimanded for making claims they cannot substantiate.
Financial promotions are even more heavily regulated, with firms authorised by the Financial Conduct Authority bound to be rigorous in the way they advertise their services.
But the rules around claiming to be green are largely undefined, says O’Connor.
‘One of the reasons greenwash happens in asset management is that the requirements for quasi-regulatory schemes, things like the UN Principles for Responsible Investment, are actually pretty loose.
‘Responsible just means exactly that, although it is often taken to mean the same as green.
‘It isn’t, it just means your money is looked after sensibly and mindfully of all risks, including environmental risks. But the word is bandied around, inviting people to assume that it means whiter-than-white.
‘It’s a bit like claiming to be vegan, but still eating good quality meat. You’re not vegan then, are you?’
Trying to screen what’s really green and what’s paying lip service is not easy.
There are many labels – responsible, socially responsible, ethical, sustainable, ESG – environmental, social and good corporate governance – and positive impact investing.
‘Pretty much all of these would still allow fossil fuels in except positive impact,’ says O’Connor.
Although, she adds, it is increasingly rare to find fossil fuels in sustainable funds, it’s not impossible.
ESG and responsible funds can have fossil fuels companies in them and often do, on the basis that they are ‘best in sector’ or because they score highly for social and governance factors, even though they are destroying the planet.
A clampdown on greenwash is overdue
A number of government and regulatory consultations are underway in a bid to curtail greenwash and improve transparency on climate exposure in listed companies.
The Financial Stability Board Task Force on Climate-related Financial Disclosures was set up by former Bank of England governor – now UN special envoy for climate change, Mark Carney several years ago.
Its mission is to develop ‘voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders’.
These were loosely outlined by Carney during a speech at the launch of the UN climate change conference’s Private Finance Agenda event at the Guildhall in London, on 27 February 2020.
Conservationist David Attenborough and Britain’s Prime Minister Boris Johnson launching the United Nations’ Climate Change conference, COP26, earlier this year. The conference is now due to take place in Glasgow in November 2021
Following that, the Financial Conduct Authority announced a consultation on how to apply these financial disclosure on climate change exposure rules to public companies, but there are no plans so far to subject funds or private companies to the same rules.
A similar consultation is going on at the Department of Work and Pensions, but won’t conclude until next year at the earliest and initially, is likely only to apply to the UK’s very largest pension schemes.
Even if these disclosures do eventually apply across the board – and it’s likely they will – there is still a real lack of standard definition around what is meant by green, ethical and sustainable.
Disclosure recommendations are also voluntary at the moment.
Kim Daye, a climate change and sustainable communications expert, said: ‘While a huge majority of financial services providers are making changes to the way they operate in order to tackle the climate crisis, we’re living in a transitional period, none can claim to be perfect yet and not all are moving at the same pace.
‘The challenge for consumers is spot the difference between real, positive commitments to change in the form of an honest dialogue and those businesses overstating progress to tap into the trend of appearing eco-conscious because it sells.
‘An honest dialogue with consumers is clear and specific so look upon vague statements as a red flag.
‘If a financial institution, product or service is marketed as ‘green’ or ‘sustainable’ without an explanation of how, ideally backed up by science and data, don’t take it at face value and dig a little deeper.’
At the moment, investors face very muddy waters when it comes to telling what is really green
As it stands there are no formal plans to introduce any consequences for false claims, such as censure or fines, which would be akin to financial promotions and rules imposed by the Advertising Standards Authority.
‘Responsibility needs its own regulation and a separate body,’ says O’Connor.
‘You need sustainability professionals regulating claims by asset managers, rather than the Financial Conduct Authority, whose skill set is around financial risk.
‘Although responsibility level has a bearing on risk, that’s not the bit that’s being policed here.
‘Making sure that asset managers and banks are using the right label for the right investment option, that their marketing communications is ‘clear, fair and not misleading’ on their green claims, will be a thankless task but it’s a necessary one for consumers.’
Full transparency on holdings is the first hurdle.
‘We need to dispense with this excuse that we don’t need to be transparent because people don’t care that much,’ says O’Connor. ‘They won’t know they have anything to care about until transparency enables them to see.
‘People could ultimately lose money if it turns out that claims made are not correct, so this is a non-trivial question and I’d hope to see more coming from the FCA in the next few months.’
Is Donald Trump greenwashing?
Trump on a rally in Boston this weekend
US President Donald Trump declared himself the ‘number one environmental President since Teddy Roosevelt‘ in a recent speech in Florida.
According to a post on Instagram, Trump claimed that presidential rival Joe Biden’s environmental plan would ‘give a free pass to the world’s worst foreign polluters, like China, Russia, India, and many others’ and said that he, in comparison, would ensure the US has ‘the cleanest air and cleanest water on Earth’.
Critics claimed Trump is attempting to greenwash his environmental record to date in an effort to win over voters.
Speaking to the New York Times, Ariel Hayes, the political director of the Sierra Club, said: ‘Failing to adequately fund Everglades restoration, attempting to sell off our waters to corporate polluters and rolling back more than 100 environmental protections doesn’t make you anything other than the worst president ever for the environment and climate.
‘Voters in Florida and across the country have watched Trump achieve this status for nearly four years, and no amount of greenhouse gaslighting will change that.’
Trump has pulled the US from the Paris climate agreement, removed climate change from a list of national security threats and relaxed restrictions on air pollution.
Last month he also opened up Alaska’s Arctic National Wildlife Refuge for oil and gas drilling.
Experts from Harvard Law and Columbia University Law Schools predict that by the end of his first term, the Trump administration will have reversed around 100 environmental rules and regulations, according to @euronewsliving.