What is ESG greenwashing?

As a consumer, you may be familiar with the term greenwashing. Typically, it refers to the practice of labelling products as environmentally friendly when that claim may be hard to verify or even untrue.

For environmental, social and governance (ESG) investing, greenwashing extends beyond environmental claims. While ESG investors can be motivated by environmental concerns, they may also be focused on social and governance issues.

ESG greenwashing can happen when a company or an investment product (such as a mutual fund or ETF) is marketed in a misleading way. This could include inaccurate descriptions of a fund’s ESG attributes. And some companies may not accurately describe their ESG-related practices, policies or outcomes.

There are many ways greenwashing in ESG investing can happen, including:

• Misleading advertising and information
  A company may have advertisements or information on their website that suggests a fund is focused on ESG when it is not. Some products are named to sound like an ESG product but do not have any ESG elements.
  
  Some companies exaggerate the impact of their ESG activities. Sometimes, only part of a company’s operations adheres to its ESG claims. For example, a fossil-fuel free company may not use fossil fuels in its operations, but it might import parts from another company that uses fossil fuels

• Public ESG commitments without follow-through
  A company or asset manager may make ESG commitments in the media but fail to demonstrate ongoing progress toward those commitments. This could be either inadvertent or intentional.
  
  All investments are marketed and described in some way. It is important to be aware of greenwashing when selecting ESG investments. Being aware will help you ask the right questions when adding these investments to your portfolio.

What do retail investors need to know about ESG greenwashing?

There are different ways greenwashing can happen in investing. And, unfortunately, it is not always possible for retail investors to know it is taking place. However, there are four steps you can take to better understand your ESG investments:

1. Identify your ESG goals or desired outcomes
   There are many types of ESG funds with different focuses and strategies. Knowing what ESG goals you hope to achieve by investing can help you find funds that meet these goals or investment outcomes.
2. Check the fund’s objectives
   When you read the prospectus of an ESG fund, you should see its ESG focus included in the investment objectives. For example, the focus could be on reducing greenhouse gas emissions or improving/demonstrating board diversity of the companies included in the fund.
3. Research the fund’s investment strategies
   An investment fund must disclose the investment strategies used to achieve its investment objectives in its prospectus. This includes describing the type(s) of strategies used to achieve ESG targets (for example, negative screening or positive screening) and the industries or companies the fund focusses on.
4. Ask your advisor for more information
   Once you’ve determined your ESG investing goals or desired outcomes, it’s a good idea to include this in conversations with a registered financial advisor, if you have one. They can help you identify funds to help you meet your goals. Your financial advisor can also provide you with more information about the investment objectives and strategies of funds you are interested in.

Any investment choice, ESG-related or otherwise, should be a good fit for your risk tolerance level, investment time horizon, and investing personality.

3 considerations for investing in companies for ESG reasons

There are a few things you should think about before investing in a company for ESG reasons, including:

1. Evidence to substantiate ESG claims
   Consider what evidence the company uses to support its ESG claims. For example, if a company has committed to net zero emissions, has it disclosed how it plans to achieve this? Also consider if well-recognized data collection methods are being used, such as the GHG Protocol for GHG emissions information.
2. Limitations of evidence or data
   ESG information is an evolving area. In certain contexts, there are limitations when it comes to collecting data. Consider whether a company has disclosed any limitations with the data and its ESG performance.
3. Cherry picking
   Is the company emphasizing certain kinds of ESG information and downplaying others? Consider whether the information provided by a company shows the full ESG picture or if there are gaps in the disclosure.

Learn more about understanding Fund Facts, the documents that summarize key information about mutual funds you’ve purchased.