In recent years there has been growing interest in responsible investing, where environmental, social and governance (ESG) issues are analysed during the investment process. But as this approach has become more popular, a new risk has emerged for investors. It is called greenwashing. Here we find out what greenwashing is and how to avoid it.

What is it?

Greenwashing is simply where a company or investment manager claims that they are serious about ESG (environmental, social and governance) issues, when in reality they are taking little action. It is usually an attempt to improve their public relations, or perhaps to attract new investors or customers.

For example, a company might make vague claims about reducing carbon emissions, to improve their current public image, with no intention of following through on their word in the future. Similarly, a fund manager might rebrand an existing product with an ESG label without making any changes to the underlying investment portfolio or process.

ESG issues: a definition

ESG issues can be split into three areas:

E -  Environmental issues such as renewable energy, carbon emissions and pollution, and the sustainable sourcing of natural materials.

S -  Social issues including the recruitment and retention of staff, health and safety measures, and the quality of working conditions along the supply chain.

G -  Governance issues, such as the structure of a company’s board, and how its executives are paid.

A growing problem

In recent years, ESG issues have become more important for consumers and investors alike. Responsible investing has exploded in popularity, with assets under management exceeding $1 trillion earlier in 2020. And over the first half of the year, 258 new funds were launched, all of which used ESG analysis in their investment process, pursued a sustainability-related theme or aimed to make a positive impact alongside a financial return.

Greenwashing is a direct result of companies trying to capitalise on this change in priorities. And if this trend continues, as we expect it will, there is every chance that greenwashing could become an even bigger issue.

How can investors avoid greenwashing?

An easy way for investors to avoid greenwashing is to use an investment manager with a strong and consistent due diligence process. Alongside the traditional financial metrics, an investment manager can analyse and score underlying investments on a variety of ESG issues. They can also compare any ESG-related claims or policies with actual data, to check that they aren’t exaggerated or simply incorrect.

What we’re doing at Architas

At Architas, responsible investing is our default approach. ESG analysis is an integral part of our investment due diligence process, and we are working hard to score every single one of our underlying funds on their ESG performance.

Since 2018 we have been signatories of the United Nations Principles for Responsible Investment. This means that we are committed to developing a global financial system that benefits the environment and society, by promoting the importance of ESG issues and incorporating these in our investment process.