How this latest buzzword relates to investing.
With increasing awareness of climate change and social issues, more investors want to be able to invest in funds that align with positive outcomes for society and the environment. As a result, the demand for sustainable investment products is growing rapidly. In fact, a recent Morningstar report found that global inflows into sustainable investment products increased by 88 per cent in the last quarter of 2020. By 2025, global assets in this category of funds are expected to surpass US$53 trillion, according to Bloomberg Intelligence.
It’s great that investors are mindful of environmental, social and governance (ESG) related issues and that there is a widening range of sustainability-related products to choose from. However, new challenges have surfaced, including the risk of greenwashing.
Although the term “greenwashing” has been around for a while, it has become more mainstream recently. Simply put, greenwashing is the act of making false claims or providing misleading information about how environmentally friendly something actually is.
Let’s say a product is marketed as being made from recycled plastic. Sounds great, right? But when you read the fine print, it becomes clear that only one per cent of the material used to make it is recycled. While the statement about recycled plastic isn’t technically a lie, it misleads consumers into thinking the product is eco-friendly when, in fact, it’s not.
Greenwashing can also apply to investing and could happen in a number of different ways. It might be a misleading fund name or marketing that doesn’t reflect the true nature of a fund’s objectives. Other examples might include a lack of adequate information about a fund’s sustainability-related strategies, or a fund’s asset manager failing to meet sustainability-related commitments.
Why is this happening?
Ensuring sustainable products live up to sustainability claims is complicated. Due to how fast the demand for these types of products has grown, standardized frameworks are still being worked out, which should set out:
- Clear guidance and standardization for disclosure and regulatory approaches
- Well-developed sustainability-related practices for asset managers
- Clear and consistent disclosure requirements, both at the product and asset manager levels
- Consistent terminologies
- A clearly defined product classification system
- A standardized reporting mechanism for asset managers
How can investors choose products that meet their sustainability expectations?
The reality is that most asset managers are financial experts and not necessarily environmental experts. However, greenwashing is less likely when asset managers are clear about their process and transparent about what their funds do and don’t do.
It’s also a good idea for investors to do their own research. Looking closely at what they plan to invest in, and learning about a fund’s asset manager, the fund’s contents, strategies and objectives, and individual companies’ practices can go a long way towards reducing the chances of being misled. When investors are knowledgeable about the content of a fund, they are more likely to be able to make an informed decision.
Investors can also talk to their advisor about what’s important to them – about what they want to see in terms of sustainability. Here are some questions that may help you to begin a conversation with your advisor about sustainable investing:
- What companies are represented within the fund?
- How have these organizations been assessed to be considered sustainable?
- What are these organizations doing to help make the world a better place?
When advisors have a clear idea of what their investors are looking for, they can help them more easily identify misleading information to help avoid the risks of greenwashing.
Speak with your advisor
If you are interested in investing in companies that make positive contributions to society or the community, or those that contribute to fighting climate change, let your advisor know.
They can help you explore funds that work for your long-term investing goals while living up to their sustainability mandates.
As an investor, it’s important to understand how your personal values can impact investment decisions:
- You might wish to avoid certain business sectors because the products or services provided clash with your own sense of right and wrong
- You might feel strongly supportive of or opposed to certain social causes and wish to be aligned with like-minded companies
- Family influence may be strong where the choices you make follow along with what your parents supported
It may be useful to refer to this article that explains the factors that can influence our investment decisions.