“Greenwashing” is the big issue in sustainable finance when it comes to investing, says Prof John Cotter of UCD School of Business. The term refers to giving a false impression of how environmentally sound a company’s products or processes are – companies making claims, for example, designed to deceive consumers into believing their products are more sustainable or have a greater positive environmental impact than they actually do.
In sustainable finance, awareness around greenwashing means questions should be asked about the validity of any investment’s sustainability claims. Transparency is increasingly important.
“It might appear that oil companies are the cleanest companies in the world – which would be peculiar, to say the least,” says Cotter. “And then you realise that most of the documentation is marketing, as opposed to clinical statistics.”
Greenwashing, by its very nature, can dent consumer confidence. Increasingly, retail investors are calling out misinformation.
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“When retail investors go on a mission, they can make a big difference,” says Cotter. “Investors are looking for more accurate and robust reporting. If companies are guilty of greenwashing, then any commentary down the line would also be viewed as suspect.”
For companies to be more credible requires great effort, and not just marketing strategies. Getting the documentation correct is becoming more complex, with large numbers of metrics. This is where things can get murky; often environmental, social, and governance (ESG) consultants are paid by companies firstly to advise them and then to do a rating.
“It’s common practice in the banking industry,” says Cotter. “Typically, in the corporate bond industry, companies employ people to rate their product but they are also paying them to advise them on how to get a good rating. This does not help the situation.”
This has not been a great year for ESG investing; fund flows are negative, meaning more money has come out of ESG than has gone in.
Alison McMurtrie, chief executive and principal at Idunn Consulting, believes investment firms still need to be convinced of the business case for ESG. Despite evidence to the contrary, a perception persists that ESG investments underperform.
“This, combined with the lack of trust from greenwashing in the news, damages their appetite to put these investments in front of clients,” she says.
Reduction in investment in, and focus on, the social aspect of ESG has been a notable trend, says McMurtrie, exemplified by Microsoft announcing cuts in its diversity, equity and inclusion programme.
Governance is also an issue, she adds: “There is a lack of clarification as to how far down a supply chain [a company is] actually responsible for; it is very difficult, and different in different regions – this leads to ambiguity. This in turn muddies the reputations of companies and so-called green or ESG investments.”
However, there is an upside too, as McMurtrie points out. There is, she says, “an openness to report on the missed objectives, and transparent commitments”.
“Individual investors are asking the questions – and this is a start, as it will drive awareness and better reporting,” she adds.
The challenge today is the push and pull between capitalism and conscious capitalism. Can ESG investments drive the same returns as non-ESG? ESG investments will not become mainstream or survive unless companies report transparently and are consistent.
“Investment firms cannot offer ESG investments and ESG strategy but at the same time offer polluting investments,” says McMurtrie. “Decisions need to be made as to whether the investment thesis will change, or we continue to chase profit and status quo.”
Cotter also sounds a note of warning on the upcoming US presidential election; 2025 could be a lot worse for ESG investment, he says, depending on the result.