What is greenwashing and why is it important?

The COVID-19 crisis has shone a spotlight on responsible investing, or Environment, Social and Governance (ESG) as it’s known in the industry. In the wake of shattered economies and shocked health, people have shifted their focus towards a different kind of investing, one that takes into account the most precious thing we own, our planet.

The penny seems to have dropped for investors and companies alike that if we don‘t build businesses with a clearer plan to grow sustainably, then we simply will have no economy in the future to take our wealth from. But not all companies are playing fair and in fact some companies are looking to capitalise on this new ‘do the right thing’ trend, but not in a good way.

What is ESG Investing? 

ESG stands for Environmental, Social and Governance investing and also known as responsible or sustainable investing. Many of the fund managers are now selecting companies which aim to support one or more of the 17 sustainable development goals that the United Nations has rolled out to support their 2030 agenda.

ESG vs Ethical

ESG investing is a positive proactive approach to investing. Fund managers with a sustainable investment mandate will target investment into companies that have been identified as having a positive social and environmental impact.

Ethical investing employs a negative screening process and invests in companies which do not participate in certain types of activity such as tobacco production, manufacture and sale of firearms and mining.

In contrast, some types of ESG  investing applies a positive screening approach when selecting investments; assessing and rating companies on whether their practices, production and overall business models demonstrate a positive trend to comply with ESG principles. 

Has the pandemic been the wakeup call to ESG?

Now, the rise of ESG isn’t a new thing and there has been an influx of new money into sustainable funds for many years now. 2021 began where 2020 left off and the record demand still ensues with global assets under management reaching $2 trillion, and $185.3 billion global inflows in the first three months of this year1

What the pandemic has taught us is that companies designed with a sustainable outlook for the future have been able to weather the storm throughout the crisis. Put simply, a business that is going carbon neutral, diversifying their supply chain, and enforcing equal opportunities is a safer investment than one that isn’t. A statement which has been backed up by performance seen in 2020.

In research published by Fidelity International, an analysis of more than 2,600 companies showed that stocks with higher ESG ratings outperformed in 2020. Companies with an eye on good corporate governance and a sustainable outlook on the future have demonstrated greater resilience and potential for growth in uncertain times2

Now whilst ESG investing has brought many positives; an opportunity for retail investors to make a difference with their money, strong performance during market uncertainty and a shift in company ethos, to name a few, ESG has also been the birth to another phenomenon; greenwashing.

What is greenwashing?

Greenwashing is a form of marketing or public relations (PR) whereby companies claim to be aligned with ESG objectives and principles. Firms look to capitalise on the positive light that the ESG title brings without truly displaying or holding these responsible or sustainable polices. And for investors if they actually looked under the bonnet of these so called ‘greenwashed’ funds, they may be surprised to discover where their money is actually going.

Why is greenwashing important? 

The problem is there are so many shades of green and so many sustainable marketing jargon it can be confusing to the retail investor as to what is real and what is too good to be true. So how can you spot or avoid greenwashing when looking to invest your money in a responsible way?

The key is in your due diligence. It is so important to do your research before investing and truly under the investment and how it aligns with ESG principles.

Can you answer the following questions? 

  1. Can you evidence how the fund managers are pursuing ESG principles?
  2. What investment decisions are they making and how does this align with a sustainable outlook?
  3. Can you scrutinise all of the fund holdings, what are the underlying companies and how are they evidencing ESG?

It is important you engage with a professional adviser to ensure the appropriate investments are chosen from the outset, and are clearly aligned with your investment approach and views. Feel free get in touch and speak to one of our Advisers who would be happy to help.

The regulatory landscape

Appearing more sustainable or ethical than you really are creates a landscape where investors are being misled or mis-sold products that fail to meet their needs. This has been a concern for the regulators for some time as they look to tackle the issue.

The EU has continually been the global trend setter when it comes to ESG and as of March 2021 new EU regulations have come into force. The Sustainable Finance Disclosure Regulation (SFDR) enforces a requirement to provide clients and investors with certain ESG related information when marketing products within this field. Basically, if something is going to be marketed as ESG it must publish standardised material that can evidence this.

However, with the UK’s exit of the European Union it has not implemented SFDR and instead plans to create its own green taxonomy and ESG disclosure requirements, essentially introducing a common ESG language for all to use and understand.

The intention is for this to create a language that is universally used and regulated to allow definitions of what is ESG, and more importantly, what isn’t ESG, to be understood by everyone.

With a level playing field for disclosure, greenwashing by its definition should become a thing of the past. You would hope. But for now, it’s very relevant. At The Private Office (TPO), ESG for us isn’t simply an investing fad and it is at the heart of our business.

Not just talking the talk – our sustainable credentials

  • 25% of our future value will be gifted to environmental charities, Restore our Planet and The Catalysts Foundation.
  • We are an equal opportunity employer
  • Our London office is a carbon neutral building
  • Our business cards are printed on Carbon Capture paper
  • We have used reusable water bottles for filtered still and sparkling water in all of our meetings since we started 10.5 years ago. We estimate this will have saved over 19,000 plastic bottles.
  • We actively encourage the use of public transport where possible and provide travel loans for our staff to fund the purchase of travel passes.
  • In all of our offices we use energy efficient water heaters to provide tea and coffee making rather than kettles.

If you are keen to find out more about investing for a sustainable future and how we can add value please get in touch to arrange a free consultation today! 

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Please note: The value of your investment can fall as well as rise and is not guaranteed.

This article was written by one of our advisers Danny Lea

Sources

  1. Morning star
  2. Fidelity