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Intro

The growing need for sustainability and the recent increase in sustainable investment options might have an undesired side effect – greenwashing investments. Some companies might take advantage of the ESG trend and try selling a greener version of their businesses to consumers and investors. Being able to identify and avoid greenwashing investments is crucial for a sustainable investor.

Greenwashing as defined by Investopedia is:

“…the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.”

The term was first introduced by environmentalist Jay Westerveld in 1986 while writing his term paper about multiculturalism. He defined the concept of “greenwash” three years earlier, in 1983, when traveling in Fiji. He noticed that the Beachcomber Resort was asking its guests to reuse their towels to reduce ecological impact. ‘Help us to help our environment’, they said.

The irony, however, is that at that same time the resort was expanding its footprint, building more bungalows, and consequently increasing its environmental impact on the island. It was clear to Westerveld that the  concerns of the resort were cost-related, not environmental or ecological.

Examples of greenwashing investments – The Seven Sins

Greenwashing can be practiced in many shapes and forms. It can be done without the full knowledge of the company or its employees, as a Corporate Social Responsibility (CSR) mistake. It can also be a deliberated and elaborated practice to mislead consumers, regulators, and investors.

The seven types of greenwashing investments sins are defined below:

Sin of the hidden trade-off: A claim suggesting that a product is green based on a narrow set of attributes without attention to other important environmental issues. Example: Fiji Water claiming that its plastic water bottles are carbon negative.

Sin of no proof: An environmental claim not substantiated by easily accessible supporting information or by a reliable third-party certification. Example: BP communicating net-zero ambitions without providing a clear roadmap to achieve it.

Sin of vagueness: A claim that is so poorly defined or broad that its real meaning is likely to be misunderstood by the consumer or investor. Example: not being straightforward about which emissions are not disclosed in company reports.

Sin of worshiping false labels: A product that, through either words or images, gives the impression of third-party endorsement where no such endorsement exists. Example: using unofficial certification as if they were issued by third parties.

Sin of irrelevance: An environmental claim that may be truthful but is unimportant or unhelpful for consumers seeking environmentally preferable products. Example: promoting recent company investments in renewable energy, when they represent a tiny fraction of the company’s total budget.

Sin of lesser of two evils: A claim that may be true within the product category but that risks distracting the consumer from the greater environmental impacts of the category as a whole. Example: fuel-efficient SUVs (sport-utility vehicles)

Sin of fibbing: Environmental claims that are simply false. Example: Volkswagen emissions scandal in 2015

Spotting greenwashing as a consumer vs. as an investor

There are essential differences from a consumer perspective vs. an investor perspective when identifying greenwashing.

Greenwashing is more easily practiced by companies in the consumer goods sector. Small investments in marketing and product labeling are sufficient to mislead end-consumers when they are buying products and services. Consumers usually have less time to dedicate to each product they buy, making it more challenging to identify and avoid greenwashing.

On the other hand, investors are (or at least should be) less impulsive and should dedicate more time to select the company or fund they want to invest in. However, investors face a more challenging task since companies will go the extra mile by providing imprecise or misleading information to avoid losing shareholder value. The type of due diligence required from investors is more complex and more demanding.

For investors, on top of the existing challenges to evaluate a single company, there are additional complexities of financial products, which contain several holdings or asset classes.

Spotting greenwashing investments – individual stocks

When investing in individual stocks, investors should look for greenwashing signs in different parts of the company. Greenwashing can be spotted at the company communication and marketing efforts, or be more subtle, for example when the company reports its performance vaguely.

It is recommended to look for:

• Excessive green marketing and public announcements that are “too good to be true”
• Verify the company history of ‘say-do’
• Be sure that certifications are done by official 3^rd parties

If possible, also perform a quick company analysis:

• How does the company compare to its industry peers? Are they the front runners in sustainability or just trying to catch up with competitors’ announcements?
• Does the company have a Sustainability Report and ESG datasheet? How do they look now and how much of a change is required for the company to achieve its ambitions?
• How much do the company’s future investments in sustainable projects represent of its overall capital expenditures? A significant share or only a fraction of the company’s annual budget?
• Is there a clear roadmap with clear actions and budget allocation for the implementation of the changes announced? Or only wishes and promises?
• Is the plan too far out in the future? Ambitions of more than 10 years (2040, 2050) can easily be postponed or deprioritized.
• Are company emissions clearly disclosed for Scope 1, 2, and 3?

Another approach is to do a reverse analysis and quickly check how the company you are researching ranks in sustainability according to different sources:

• PERI (Political Economy Research Institute), University of Massachusetts Amherst, Combined Toxic 100 / Greenhouse 100 Indexes
• 24/7 Wall Street, 20 corporations generating most ocean pollution
• Greenpeace, Greener Electronics Report
• Newsweek, Green Ranking 2017 – Global 500
• CDP (Carbon Disclosure Project), Carbon Majors Report 2017

If the company is performing poorly on those rankings, there is a high probability that they are promising more than what they can deliver.

The lists above are also a great resource for you to start creating your personalized list of companies to avoid.

Spotting greenwashing investments – exchange traded funds (ETFs)

When investing in investment funds, investors need to extend their due diligence and evaluate how the fund or ETF providers are packaging their financial products.

A few points to focus on:

• Be aware of misleading fund titles (look behind the terms ESG, SRI, Impact) – read the fund prospect and its exclusions
• Check the fund allocation percentage per industry to identify undesired industries
• Perform in-depth holdings analysis (go beyond the top 10 holdings and cross-check with the individual company’s sustainability performance)

If you already know which companies to avoid, then you can use the ETF Stock Finder from ETF.com. There you can see which ETFs contain a specific stock.

An interesting example of misleading ETF title is FlexShares STOXX U.S. ESG Impact Index Fund (ESG). This ETF contains shares of Exxon Mobil Corporation which is on the top of the Carbon Majors Report list. Globally it is the company with the 5^th highest accumulated GHG emissions between 1988-2015 (17,785 MtCO2e). Notice that XOM (Exxon Mobil) does not appear at the Top10 holdings of that ETF. However, by using the ETF Stock Finder we can see that it has an allocation of 1.49% on that ETF.

Another example is the iShares Global Clean Energy ETF (ICLN). According to iShares, this ETF has the following investment objectives:

i) Exposure to companies that produce energy from solar, wind, and other renewable sources,

ii) Targeted access to clean energy stocks from around the world, and

iii) Use to express a global sector view.

Despite its relatively high MSCI ESG Rating of ‘A’ and MSCI ESG Quality Score of 7.0, the ETF has an average carbon intensity of 239.9 tons CO2e/USD million in sales, which can be considered high for a ‘clean’ ETF. A quick look at the sector breakdown reveals that it has 2.85% allocated to the Oil & Gas industry. For an AUM of USD 1.1 billion, this represents USD 31.4 million allocated to fossil fuel assets.

Conclusion

It can be tricky for an untrained eye to identify and avoid greenwashing investments. Companies that pollute the environment or are low on social responsibility will do whatever is possible to sell consumers and investors a greener version of their businesses.

Ultimately, to identify and avoid greenwashing investments, investors need to be more attentive and dedicate extra time when making their investment decisions. It is necessary to go beyond the first impressions, and investigate subtle communication changes, flaws on sustainability reports and vague top management promises.

We, at Your Green Wealth, intend to bring more light into this topic and be sure that companies with a history of greenwashing are exposed and avoided by investors.

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Not investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decision.

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