Thoughts on greenwashing

The range of ‘sustainable’ or ‘green’ investment products is proliferating as investment managers respond to investor demand for action on climate change and more ethical and responsible investment options. But investors need to be on their guard against ‘greenwashing’.

What is greenwashing?

According to the New Zealand Financial Markets Authority (FMA), greenwashing is overstating the green features of a product or fund or mislabelling a product as “green” or providing misleading information¹.

There is growing unease globally about the risks of greenwashing, which is due partly to the quick growth of this asset class, and partly to a lack of global or domestic regulatory standards or agreed classification on what an ethical or sustainable investment is, and how ethical and responsible investment products should be labelled². Until laws are introduced in New Zealand, investors need to be alert to ‘greenwashing’ and conduct their own research.

Ethical and responsible investment can be broken down into several categories:

• Environmental, Social, and Governance (ESG) integration
• Ethical investing
• Impact investing
• Sustainability-themed investing
• Best-in-class approaches
• Activist investing

Engagement is sometimes referred to as a style of ethical and responsible investment. But stewardship activities such as proactively engaging with companies and voting at company meetings can and should be applied over all types of investment to improve long term financial outcomes and ESG performance.

Greenwashing examples

ESG integration involves including consideration of ESG issues in investment decision making. Often those considerations are subjective, and it can be difficult for investors to gain comfort that the manager does what they say they do. In Germany, for example, Deutsche Bank-owned manager DWS is facing legal action for allegedly misrepresenting the extent of ESG integration.

Best-in-class investing typically means picking the companies within a sector that rank highest on one or more ESG factors. Factors may be based on completely objective data or have some degree of subjectivity. A typical approach would be to rank companies on their ESG ratings as scored by a third-party research firm. An issue with best-in-class investing is it can sometimes mean ‘least bad’ and may not be consistent with the investor’s values or objectives. A product may have exposure to best-in-class fossil fuel companies when the investor’s expectation, based on labelling and marketing material, is it should have no exposure at all.

Betashares offers true-to-label ethical investing products to New Zealand investors.

Ethical investing typically involves the application of negative screens to exclude investment in companies whose activities have detrimental impacts on people, society, or the environment, or whose behaviour has been inconsistent with accepted norms. Negative screens often incorporate what is called a ‘materiality threshold’ (generally a certain level of revenue) which means only companies above the threshold are excluded from investment. For example, a screen may exclude companies that generate more than 5% of their revenues from the production of alcohol. Positive screens may also be used to invest in companies that may, for example, meet certain ESG criteria such as a low carbon footprint. The term ‘ethical investing’ is sometimes used interchangeably with the term ‘socially responsible investing’ (SRI).

Asking the right questions

The investments in some ethical and responsible investment products may not align with an investor’s expectations or values. Investments labelled ‘sustainable’ may have material exposure to fossil fuels for example and others labelled ‘socially responsible’ may have exposure to bonds issued by governments that contravene human rights. It is therefore important for investors to carefully assess the suitability of any product they’re considering investing in.

A good starting point is to the ask the following 5 questions:

• Do I understand how securities are chosen for this portfolio?
• Is the methodology consistent with my objectives?
• What companies does the portfolio invest in and what do those companies do?
• Is the investment product certified as sustainable or ethical by an independent organisation?
• Do any metrics back the claims being made about the greenness or sustainability of a product?

Betashares options for investors

Betashares’ ethical and responsible investment NZ Funds provide New Zealand investors with access to passively-managed, diversified portfolios of shares. Importantly for investors and their advisers, the methodology and rules-based process used to select and weight securities for each fund is transparent, and Betashares publishes portfolio holdings on a daily basis.

Betashares’ ethical investment NZ Funds invest in ASX-listed ETFs that have been certified by the Responsible Investment Association Australasia (RIAA) as ‘Certified Responsible Investments’ according to strict operational and disclosure practices required under the RIAA’s certification program³.

Betashares has been identified by the RIAA as a ‘Responsible Investment Leader’ according to criteria set out in its 2022 Responsible Investment Benchmark Report⁴.

Ratings are only one factor to be taken into account when deciding whether to invest in a financial product. You should make your own assessment of the suitability of this information.

References

1. https://www.fma.govt.nz/consumer/investing/ethical-investing/
2. The International Organisation of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns. ASIC is participating in this task force.
3. The Responsible Investment Certification Program does not constitute financial product advice. Neither the Certification Symbol nor RIAA recommends to any person that any financial product is a suitable investment or that returns are guaranteed. Appropriate professional advice should be sought prior to making an investment decision. RIAA does not hold an Australian Financial Services Licence. www.responsibleinvestment.org