Investment fundamentals: Greenwashing

Sustainable investing is a hot topic. Many investors are concerned about a wide range of sustainability issues—from fossil fuels to agricultural practices and everything in between. Companies have picked up on this, and most are now highly motived to demonstrate their commitment to sustainable practices. But sometimes, they resort to greenwashing to boost their credentials.

What is greenwashing?

In order to appear more environmentally sound than they really are, some companies engage in greenwashing (providing misleading information or a false impression related to their products or investment strategies). To address greenwashing concerns, the European Union has established more rigorous standards for products that carry a sustainable label. Initially intended to combat greenwashing, these regulations appear to have had the opposite effect: some firms have rushed to label their products as “sustainable” with the intention to iron out the details later.

Why do companies and fund managers greenwash?

• Supply and demand: Client demand outweighs ESG supply
• No standardized criteria: There is no regulated guideline that makes a company ESG compliant
• Pressure and incentives: Gain favor from market consumers and non-market actors

It’s not easy being green

Investors must do some legwork to discern whether a company that claims to be operating in a sustainable way actually is—and whether what they are doing truly makes an impact. In other words, don’t believe the hype.

When it comes to evaluating investment solutions that promote themselves as sustainable, the first step is to understand the approach that the investment product takes. Sustainable isn’t a one-size-fits-all label. Is it exclusionary (avoiding companies that do not operate in a sustainable way) or an ESG integration strategy? Or is it an impact investment (investment strategy that seeks to achieve social or environmental goals) or a thematic investing strategy (focuses on predicted long-term trends)?

Next, look beyond the marketing materials and instead identify measurable examples of how (or if) the investment decisions makes align with the stated philosophy.

Finally, examine information about the product or strategy from disinterested third-party assessments. Firms such as Morningstar and MSCI provide sustainability ratings on many types of investments.

Important information

ESG and Sustainability are not uniformly defined across the industry. Environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. There are risks involved with investing, including loss of principal.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.

Past performance does not guarantee future results.