AlphaChat: Greenwashing

Greenwashing. It’s a much talked about topic in the industry, but what does it really mean and how can we be aware of the practice? James Milne, Head of Product at AlphaCert, and Stephen Huppert, Independent Advisor & Consultant, unpack the topic below in our latest Alpha Chat.

Transcript:

James Milne:

Greenwashing is something that is recently in the media. In June 2022, ASIC released an information note to help issuers avoid greenwashing when offering or promoting sustainability-related products. So we thought it would be a good opportunity for us to discuss greenwashing, what is it, and how can we be aware of the practice in the industry? So tell us, what is greenwashing?

Stephen Huppert:

Hi James. Good to be back. And yes, as you say, it is in the media a bit. And greenwashing is misrepresenting the extent to which a financial product or an organisation or an investment strategy is environmentally-friendly, sustainable, or ethical. That’s right. And there has been some research done. Evergreen consultants looked at a whole lot of managed funds and the SG credentials, and they concluded about 5-10% of those products might be classified as greenwashing. And some research done by Eco-Business reported that out of 253 funds that switched to ESG focus in 2020, 87% of them simply rebranded by adding the word sustainable or ESG or climate or green into their names. But none of them actually changed their underlying investment exposures at that time. And it’s a bit of a play on the word whitewashing, which is about misleading information to gloss over bad behaviour.

Stephen Huppert:

We all know that ESG investing is one of the most important trends at the moment in investment management, and it’s become a huge business. In the February edition of The Economist, it reported that financial products that claim to be abiding by ESG rules, currently have about 35 trillion US dollars. And Bloomberg predicts that this will pass 50 trillion by 2025. And the real question that greenwashing asks is, are ESG products true to label? And before we go into some of the details about greenwashing, it’s worth thinking about the two different types of it. On one hand, you’ve got corporates themselves putting forward their own climate change or green credentials. Are they true? And then you’ve got portfolio greenwashing, where investment managers claim that their funds produce a positive impact on the environment. And the question is, do they?

James Milne:

Yeah. What are some of the drivers of greenwashing? What do you have in terms of market drivers and maybe non-market drivers as well?

Stephen Huppert:

Yeah, so look, definitely the amount of money, the amount of attention given to ESG and sustainable investing puts a lot of pressure on organisations, on fund managers, on super funds to sprout their ESG credentials, non-intentional, unintentional. And back to the corporate greenwashing that I mentioned, if I’m a fund manager, a portfolio manager, I need to rely on some measures, some way of knowing whether the companies I’m investing in do have the correct ESG ratings.

And so, one of the big challenges, and Schroders did an investor study in 2021, said that generally institutional investors across the world agree that the biggest barriers to making sustainable investments are concerns about greenwashing and the lack of common language and data on sustainability. And you’ll see that a lot of the greenwashing legislation and regulation focus comes back to having the right data that you need to be able to assess. And so, it’s important to understand that there’s both intentional and unintentional greenwashing.

James Milne:

Yeah. And absolutely when we think about what we see from a data perspective at AlphaCert around those ESG metrics, we see wild swings in terms of maybe the scores you get from one provider to another. We see a lack of standards around what companies do and do not report to the market in terms of their ESG metrics. And therefore the data that you get amongst providers is not standardised, it can have slight biases in terms of how one company will interpret them versus another. So it’s really difficult, as you say, for those non-market drivers and the reporting side of things, it’s really difficult to get that even playing field. And that’s where you tend to see some of the greenwashing come in as well.

Stephen Huppert:

We have to realise that it’s actually quite a lot more complicated than might it look on face value. And one example of that with green bonds and definitions around what a green bond is. And there’s certainly been a number of green bonds being issued recently. And one of the challenges can be highlighted when we think about the green bonds issued by Queensland Estate here in Australia, where the money they’re raising from the green bond is absolutely being used for environmentally-friendly objectives, such as preserving the Great Barrier Reef. But some have pointed out that Queensland is also in the coal business. So whilst the green bond itself might have the right sustainability credentials should an investor look beyond the particular instrument to the ESG credentials of the issuer of that product, of that bond.

James Milne:

I see, I see. Yeah. It’s all about really looking beyond and peeling back the layers of the onion and maybe not taking these things at face value with a green or a sustainable in front of the product name. So what have we seen from regulators? How are regulators acting on the greenwashing that you mentioned, the 87% that had acted and changed their product names before? How are regulators starting to pay attention to this type of behaviour?

Stephen Huppert:

Yes, James, and regulators are paying attention around the world. As I said, here in Australia, as you said in your introduction, ASIC’s released the information note, and that’s bringing together a lot of the existing market guidance and legal duties that issuers of financial products have into one place. And it provides some useful examples and some things to look out for by issuers of financial products. And that’s looking at superannuation funds, managed investments schemes. Also here in Australia, the competition regulator, the ACCC has recently announced it’s going to be looking at the advertising around businesses doing about environmental… Whoop, excuse me, my dog just popped his head in there, about environmental and sustainable claims. So we’ve got it coming from both the financial services regulator, ASIC, and also the market regulator.

James Milne:

Right, okay. And I know that on this side of the Tasman, in New Zealand, December 2020, the FMA over here, the Financial Markets Authority also released guidance on financial products that incorporate non-financial factors. So really, they’re looking at those green bonds, they’re looking at anything that’s marketed as socially responsible or sustainable, ethical, any managed funds, including KiwiSaver and green bonds. So yeah, they’re starting to put their lens over it as well with their guidance across those type of financial products.

Stephen Huppert:

That’s right. And last year in the UK, the Competition and Markets Authority have published a Green Claims Code for businesses to comply with. And we’ve also seen in the UK, the Treasury Department has put together a Green Technical Advisory Group, which is going to be advising the UK Government around developing a green taxonomy to help tackle greenwashing. And we’ve also seen the SEC in the US, just in the last probably 6-12 months, start to get pretty serious about greenwashing as well, and publishing a number of documents saying how they’re going to be policing greenwashing in the US.

James Milne:

Right, okay. So across the world, really, we’re seeing the authorities and the regulators come out with guidance notes and how you should approach sustainable and ethical green funds and green investments in portfolios. And we talked about earlier, in the Alpha Chat, we talked about the difference between corporate greenwashing and also portfolio greenwashing. Have you seen any examples of corporate greenwashing come out? Is there anything that we can point to from that perspective, as action being taken?

Stephen Huppert:

Yeah. I mean, we’re all seeing, I know here in Australia companies are trying to use their green credentials, commitments to net zero, those sort of things in advertising, very heavily. And we’re seeing that globally, I’m sure. And even within financial services, there’s a lot of discussion about banks and insurance companies that tout their green credentials, and yet are still investing into businesses that aren’t very green, aren’t very sustainable.

Stephen Huppert:

And in the UK, the UK advertising watchdog, the Advertising Standards Authority is currently investigating HSBC. And if you go online, you can see some of the adverts on bus shelters where HSBC is really promoting their green credentials and about their net zero initiatives and how they’re planting trees to capture carbon. But if you know a little bit about HSBC and many of the other global banks, they’re certainly heavy investors in organisations, in companies with huge carbon footprints. And so, the advertising authority watchdog is deciding whether that is something that they should take action on. And I guess that could be thought of as an example of greenwashing by omission.

Stephen Huppert:

So next time you see your financial services company talking about their green credentials, it’s a lot more complicated than what you see in the advert. And it’s certainly important for all investment managers, superannuation funds on both sides of the Tasman, but globally, to be understanding what the regulations are, what the expectations of the regulators are. And understanding also that the community is becoming more skeptical as things get announced. And so it’s an element of trust as well. And that’s a big key factor in making sure you’re doing the right thing.