With the rush of money into the area of "green" and ESG investing, a concern arises about how faithful investments are to such ideas. Greenwashing has become an oft-repeated concern. We talk to a wealth management firm about what needs to be done.

The phenomenon of “greenwashing” – pretending that one’s investments are “greener” and better for the environment (although those terms can beg a lot of questions) – is a hot topic in modern finance. Whenever there is a large rush into a new area of investment, particularly in times when conventional asset classes suffer low yields or volatility, it is right for clients to practise healthy scepticism.

Anyone who has lived through the big promises of the dotcom bubble, sub-prime mortgages, and so forth, will be cautious. The need for care is all the more important when the challenge of human-caused global warming is one raised by almost every major politician, central banker, financial institution and non-governmental body. It is, in fact, almost dangerous for wealth managers not to court the “green” investor. And, as a recent controversy about a former HSBC senior figure demonstrates, expressing doubts about some of the more alarmist predictions on climate change can cost a person their job. The global energy crisis, heightened by Russia’s invasion of Ukraine, has added to the challenges about what investors should do in trying to force change in a “greener” direction.

This news service recently interviewed Petra Posnikova, investment director at VAR Capital, a financial advisory partnership offering asset management, debt finance and family office services to global clients. We asked her about environmental, social and governance (ESG) investment, the challenges around it, and the responsibilities of the wealth sector. (See here for a previous interview with the same firm.)

In a broad sense, how large do you think the "greenwashing" phenomenon is? 
In recent years, social responsibility and climate action has progressed up both the individual consumer and corporate agendas. As a population we are at last becoming increasingly conscious of our carbon footprint and there is growing pressure for businesses and brands to be more sustainable. In general, this could be perceived as a good outcome as companies are investing more time and money in protecting our environment, consumers are more aware of the carbon cost of their lifestyles and the benefit to the planet.

The result of the increased consumer awareness is that people are willing to pay more for products and services that are deemed less harmful to the planet than others. In practice, however, some corporations are using this rising movement as a marketing and revenue generating opportunity through the process of greenwashing. 

Greenwashing is often defined as a tactic “to make people believe a company is doing more to protect the environment than it really is."

It is a PR strategy used by companies to capitalise on the growing demand for environmentally friendly goods and services. This helps them generate positive publicity, boost their brand image and increase profits without reducing their carbon footprint or their consumption of scarce resources.

Greenwashing has become more common over the last decade.

You can read about some examples here. However, consumers and governments are becoming increasingly aware and clamping down on this issue through frameworks such as the Green Taxonomy Framework. This results in companies being sued for greenwashing claims, including claiming to be carbon neutral without reducing emissions at source (as shown by Arla). Thousands of companies across the globe promote their green credentials with little or no information about what they are doing to reduce emissions within their organisation. Whether a company is promoting a new line of products that are environmentally friendly, promoting ESG investments that are not fully verified or claiming to be carbon neutral without setting and keeping to reduction targets, greenwashing is present in most aspects of our environmentally conscious world. It is up to consumers and regulators to identify and penalise those companies so that the true earth champions can be rewarded for their efforts.

Why is it so serious and what damage could, or has, been done to the ESG/green/sustainability agenda?
Greenwashing affects how individuals engage with the sustainability movement, often hindering the progress of helping to protect the planet. When there is a constant stream of misleading information, trust in sustainability efforts as a whole decreases. This makes it challenging to differentiate a greenwashed company from a genuine green company. Companies need to be extremely rigorous with evidence before making ESG claims because such claims can lead to both unintentional damage to the environment and hinder a company’s reputation and trust with the public.  

VAR Capital’s partners believe passionately in sustainability and have also invested in a sustainable tech company, Greenr. It is their strongly held belief that the first step for understanding any problem is to measure it. Greenr measures company emissions for free on their website and sets reduction targets to help companies reduce at source. Not only is this in line with Net Zero Frameworks (reduction by at least 90 per cent offset and no more than 10 per cent by 2050), it also helps employees and consumers believe in our client’s motivations for helping people and the planet be more sustainable. 

Have some of the concerns also been increased by certain governments and firms reversing course in view of massive energy demands (for example, Germany firing up old coal stations, etc)?
Although the current price of energy and the instability of natural gas sources have been a large concern in Europe, we believe, and very much hope, that this will also be the catalyst needed for renewables and EV/hybrid vehicles to really turn the tide this decade. Solar and wind energy has reached grid parity, i.e. the cost of producing 1 kwh of electricity using wind and solar is the same or lower than using natural gas/coal in many geographical areas around the world, including the UK. Therefore, the remaining difficulty preventing building new renewable energy or using more green electricity is due to political agendas, timing and supply chains. These are all matters that can be resolved relatively quickly with the correct motivations and, perhaps this rising cost of living crisis is the silver lining we are looking for.

Regarding greenwashing and ESG portfolios, there has been some progress made with the Green Technical Advisory Group (GTAG) which will oversee the UK Government’s delivery of a “Green Taxonomy” – a common framework setting the bar for investments that can be defined as environmentally sustainable. Within the Green Taxonomy, there is a severe clampdown on greenwashing, with the aim of making it easier for investors and consumers to understand how a firm is impacting the environment.

With publicly listed firms there is a certain level of data which they must disclose, but this can be different with privately held firms. A large chunk of total business is run by families and private owners. How can this area be viewed when there are concerns about disclosures and transparency?
When it comes to sharing a company's commitment to sustainability goals, whether privately owned or not, full transparency is the key to avoiding greenwashing. Sustainability should in no way be purely a marketing initiative as consumers will see straight through that. It is imperative that CEOs and business owners take ownership of their sustainability efforts and clearly describe the steps they are taking to achieve their ESG targets.

Also, externally reporting ESG initiatives should be a strategic priority for businesses. We have seen clients lose consumers to their competitors due to them having less impressive sustainability credentials, and putting pressure on companies to increase their responsibility. We have also seen companies lose existing employees and fail to attract new talent due to weaker sustainability credentials compared with their competitors. Gen Zs and Millennials are demanding to work for green companies and many are willing to switch jobs and even take a salary sacrifice to make this happen.