Beware the Perils of Greenwashing Phiroza Katrak

Greenwashing is a compound word coined from ‘green sheen’ and ‘white washing’ describing the making of unsubstantiated or misleading claims about environmental benefits. The misrepresentation could be attributed to a product, service, technology, practice, or financial activity such as raising of capital, organisations spending time and resource claiming to be green or eco-friendly or benefiting society, rather than demonstrably living up to these credentials. 

Last week it was reported that EU and US authorities were investigating claims that the asset management arm, which is part of a leading German bank group, misrepresented the application of ESG integration in its funds range. The German regulator BaFin instigated its enquiry after the asset manager’s former head of sustainability made the allegations in an interview in the American press. 

Growing demand for ESG products and the linking of ESG targets to senior executive remuneration has fanned concerns that greenwashing could be on the rise. If proven, it could result in fines and a forced re-labelling of the product or practice.  Reputational damage can be the harsher consequence and, even if the claims are unproven, it could take time to rebuild customer trust.

One of aims of the EU taxonomy regulation is to protect investors from the consequences of such misleading claims. Introduced in 2020, it establishes a framework with conditions that an economic activity must meet to qualify as environmentally sustainable.  There are six environmental objectives including climate change mitigation and climate change adaptation.

So, when you see graphics purporting alignment with the United Nations’ Sustainable Development Goals or labels such as ‘sustainable’, ‘ethical, ‘green’ ‘eco-friendly’, ‘climate-aware’, ‘conscious’ and ‘compassionate’ – these are but a few examples – to describe or promote debt or investment products, you should exercise care and scrutinise the claims properly.  Some products may exemplify these descriptions, but it is nonetheless essential to make a dispassionate assessment of the criteria and outcomes rather than be swayed by such self-labelling. 

Related Insights

Local Authorities and ESG - a Match Made in Heaven?

ESG in Fund Management with Vanguard

ESG in Practice at Arlingclose