As younger investors are entering the market, they want their investments to reflect their values. These investors are attempting to use ESG criteria to inform their investment strategy. It is a noble ambition, but one that is not as easy as it should be. As we heard from protestors and others during the recent COP26 climate conference in Glasgow, greenwashing is rampant with companies and governments.
What are ESG and Greenwashing?
ESG, or Environmental, Social, and Governance criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider nature, resource use, and pollution. Social criteria consider relationships with employees, suppliers, customers, and the community. Governance deals with leadership, executive pay, audits, and shareholder rights.
Greenwashing, as defined in Investopedia, is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. It is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
What is the problem?
One challenge for investors is that there are no standards for disclosing ESG data and no standards for terminology that may be used by companies or governments when discussing their ESG data. Companies can choose the data that they disclose, cherry-picking the data that shows them in the best light while ignoring actual climate or social impact.
A recent research project by CIMR (Center for Innovation Management Research) in London found that companies that want to portray themselves as positive ESG models will often disclose large quantities of ESG data in a bid to confuse investors. Although they may be poor ESG performers, the sheer amount of data disclosed can make them appear greener or more socially responsible.
Is there a solution?
A direct result of COP26 is the formation of the International Sustainability Standards Board with offices in Montreal and Frankfort, Germany, to develop transparent and globally consistent sustainability disclosure standards.
The United States Securities and Exchange Commission created the Climate and ESG Task Force to focus on false or misleading disclosures based on the rules in place today. It will work with other agencies to begin policing what companies share with potential investors.
Investors still need to do their own homework to be sure their investments reflect their values. There is no substitute for reviewing a prospectus, not just the marketing material that is provided. Make sure investments exclude the industries that you don’t want to support.
ESG investing isn’t going to save the planet or right any social wrongs in the short term. But sending a message to Wall Street by carefully choosing where money is invested can begin the process of accountability and transparency that is currently lacking.
