What is greenwashing?

Key takeaways

  • Some companies and players in the investment industry have been accused of not being true to their claims about their practices regarding improving the environment, society or the governance of the company.
  • False claims should become more difficult as disclosure and practices are standardised and regulated.

Investing sustainably through an ESG framework can potentially have huge benefits for everyone.

It is also a huge trend and companies and managers are under pressure to show they are engaged in sustainable practices.

While some companies are making significant contributions, there are others that have been accused of making sham claims about ESG, and of using it as a clever marketing ploy. This practice has become known as greenwashing – a term derived from whitewashing.

Asset managers have similarly been accused of greenwashing after choosing to invest in companies involved in harmful practices. 

There have been some well-publicised cases of greenwashing around the world – Volkswagen’s admission that it had cheated on carbon emission tests, BP’s name change to Beyond Petroleum and marketing messages about its investments in alternative energy, and Nestle’s claim that its water bottles were biodegradable when they were not.

In some countries, company executives have been arrested and charged with fraud as a result of greenwashing.

Greenwashing likely to become more difficult

ESG is a relatively new and complex field that is evolving rapidly.

Standards for disclosing and measuring ESG factors, best practices and the regulation of these standards are also still being developed.

It is likely that as knowledge about ESG issues grow and more widely accepted standards on how entities measure and report sustainability are set and regulated, greenwashing will become more difficult to pull off.

Not perfect, but it’s our best shot

Exposés, criticism, debate and new research will all help to improve practices and possibly a greater focus on impact investments with more direct benefits for society and the environment.

Government policies may also be required to get companies to do the right thing as addressing climate change is a huge challenge.

Policymakers, regulators and the investment industry are all working on these issues.

As the focus on sustainable investing evolves, we should not expect it to deliver immediate or perfect results at all times.

However, in the meantime, capital is required to assist businesses to transition from their current activities to those that will benefit the environment and society.