Greenwashing, how to spot it when investing?

Defining greenwashing

Greenwashing was first coined in 1986 by Jay Westerveld, a researcher and environmentalist, after a trip he took to the Samoa islands: the hotel he was staying in was asking him to pick up his towels “to protect the environment” while at the same time aggressively expanding the hotel footprint near the corral reef.

Greenwashing corresponds to misleading tactics corporations use to mislead you about the environmental benefits of their products or services. Greenwashing is especially prevalent in consumer-driven and polluting industries such as fashion, consumer goods, or energy (oil & gas).

Companies doing greenwashing usually provide marketing claims about environmental issues that are not traits of their core business. It can either be by:

• exerting minimal efforts on topics that are not material to their impact and advertising it loudly (a bank powering its office space 100% with renewable energy while it still finances heavily the fossil fuel industry)
• providing false claims about the certain environmental benefits of a product (“faux leather” being just plastic)
• changing its corporate branding for the sake of looking greener (McDonald in 2009)

You can check this Chevron commercial for a perfect example of greenwashing. Here, an oil & gas company uses eco-friendly imagery to picture itself protecting nature and the environment despite its extremely harmful business practices.

Greenwashing in the financial sector

The financial sector is the latest to have witnessed a large rise in greenwashing. With rising demand from consumers to move into a green economy, large institutions have seen a big market opportunity. They started to design “sustainable products” “green products” and “socially responsible products” to lure customers and attract more funds.

In particular, there has been a boom of ETFs marketing themselves as green or socially responsible.

In 2006, only 12 ETFs labeled themselves as ESG.

In 2021, there were 884 ETFs labeled as ESG or socially responsible.

“What you get is an industry that knows if they put ‘ESG’ or ‘green’ on something, they can make a lot more money out of it”. Tariq Fancy, former chief investment officer for sustainable investing at BlackRock (originally in Vox)

And because they know that value-driven investors are likely to be less price sensitive, financial institutions are usually charging a higher price for very minimal added value. It is just pure green marketing. For example, the iShares ESG Screened S&P 500 ETF, one of the biggest ESG ETFs will cost you double.

But is it worth it to pay more than double if it has a true environmental impact if it will fight climate change? Unfortunately, the difference in impact you will have between the two ETFs listed above is minimal. In the first ETF, you have all the companies of the S&P 500, in the second 90.4% of them. You end up paying more than double for minimal changes, few rules automated on the laptop of a BlackRock analyst.

We wrote a blog digging deeper into the main “socially responsible” or “ESG” funds currently provided on the market here (we are extremely proud of the infographics).

Finally, most large financial institutions are at flaws with their environmental claims through other parts of their business: stewardship. Most financial institutions are still voting against climate proposals by activists, voting for CEOs with excessive compensation, or investing in companies refusing to reduce greenhouse gas emissions.

5 tips to help you identify greenwashing

1. Calculate the presence ratio: This might be the quickest if you want to invest in a subset of a large index (S&P500, Russell 1000). Look at the overall number of companies in the index. Look at how many companies are included in the "ESG" ETF. If it is higher than 70%, it is most probably greenwashed. No need to even dig deeper into the portfolio composition.
2. Look for third-party certification or assessments: Get the ticker number of the portfolio you own or want to buy, plug it in the As You Sow Invest your Value or in the Morningstar ETFs free tool. You can tailor those tools to your convenience (carbon footprint, animal testing, deforestation)
3. Chase green claims, track stewardship: ensure the financial provider you invest with votes in accordance with the purpose of the fund. A google search should suffice.
4. Cross-check with leaders in the field: compare your funds to what leaders in the space invest in. We like Calvert, Carbon Collective, Clim8, and Circa500. They usually disclose the funds they invest in on their investment page.
5. Take a deep dive into your own funds: if you are really motivated, you can check at the company level what is in your ETF. It is mandatory for financial providers to disclose which companies they invest in and the amount. Find the list of stocks and check them one by one. Sustainalytics offers for free their ESG Risk Ratings scoring where you can check how a company compares in regards to its industry peers. Use DiversIQ to check the diversity policies. Finally, check the different environmental initiatives of the company. Have they committed to becoming net-zero? By when? Do they aggressively reduce their carbon emissions? How do they deal with their supply chain? Check for eco-labels, green initiatives, and third-party certification (e.g. B-corp) that can help you make a fair assessment. This will require heavier lifting but will be the best way for you to learn about the impact of your savings!

Finding and identifying is a hard task! Financial institutions are extremely good at hiding crucial details or making it complex for you to find information. For example, Fidelity requires you to download a relatively hidden PDF to get access to the whole listing of their holdings in their US Sustainability Fund.

The good news is that the Security Exchange Commission (SEC) is starting to crack down on false claims and greenwashing, pushing for greater transparency. Funds will need to disclose their goals and criteria, and objectives along with data collection methodology. It is a good step in the right direction but how much people will pay attention to those? Hard to say!

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