Greenwashing is a situation whereby a company or a group of related companies claims that they are more ethical, sustainable, or green than they are. With impact investing, ESG investing, and socially responsible investing taking a significant share of the market; many traditional investments are rushing to take advantage of the same. They are giving false ESG scores and ratings to satisfy the new demands for ESG products.
However, merely marketing portfolios as ethical despite not being genuinely moral does not help, as most people are aware of this rush and are keeping a close watch on them. There are a few tips and tricks to determine whether a company truly cares about humankind or is just greenwashing. Some of these tips and tricks are discussed below in this article.
Does The Firm Exclusively Focus On Ethical Investing?
Though one of the best ways of spotting greenwashing is understanding your asset manager, you can also ask some questions. For instance, greenwashing is possible if your asset managers consider ethical investing as just one of the investment flavors alongside other traditional investments.
A mixed investment usually suffers from authenticity problems as most traditional investment companies do not adhere to ethical standards; they simply carry on business operations as usual. Therefore, mixed investment is one of the red flags for greenwashing since most companies that fall under this category lack an ethical-driven mission and do not often benefit humankind; much of the benefits are to the contributor.
Does Your Asset Manager Use the Best in Class Approach?
A best-in-class investment strategy involves investing in every sector’s most socially responsible companies. This idea is driven by the fact that not all socially responsible investments adhere to the same levels of social standards.
But the problem with this approach is that the asset manager chooses the best socially responsible companies in every industry sector, including those considered unethical to some extent.
For instance, the fund manager may choose the best socially responsible company in the healthcare and tobacco industries. In this approach, greenwashing is evident since the best-in-class company in every sector is not necessarily ethical. Therefore, the best-in-class investment strategy may not provide maximum benefit to humankind.
Are Investors Allowed to Create Their Portfolios?
“Have it your way” is another widely used approach by ethical investors, giving them the freedom to choose the ethical issues that they care about or think address the challenges of humankind. Therefore, if your investment manager doesn’t allow you to create your portfolio, there is a likelihood that the investment contains greenwashing companies.
Summary
With ethical investment taking a large share of the market today, it’s no surprise to find greenwashing companies. Some of the essential tips and tricks for spotting greenwashing is finding out if the investment firm is exclusively focusing on ethical investing; if it isn’t, there are high risks of greenwashing.
Another way to spot greenwashing is to determine if the asset manager uses the best-in-class approach to creating an investment portfolio. Also, if the investment firm doesn’t allow you to create your portfolio, there is a likelihood that the investment contains greenwashing companies.
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