ESG investing faces “greenwashing” criticism, but it could be a good thing for the sector

ESG investing, which considers environmental, social, and governance factors, has faced some criticism in recent months over “greenwashing”. While scepticism is on the rise, recent events could help improve transparency in the sector.

ESG investing involves considering non-financial factors when making investment decisions. This may mean choosing companies that are taking steps to reduce carbon emissions or have strong human rights policies. These ESG issues are reviewed alongside things like company performance and investment risk.

If you’re interested in investing with ESG issues in mind, you can find a huge range of options that may be labelled with terms like “green”, “responsible”, or “sustainable”.

However, weighing up how much good these investments are doing can be difficult and it’s important to note that ESG criteria can vary significantly between different investors.

There’s also a risk of greenwashing. This is where an organisation makes an unsubstantiated or exaggerated claim about how environmentally friendly its products or services are. From an investment perspective, it can mean investments don’t have the positive effect intended.

According to Triodos Bank, a leading expert in sustainable banking, 26% of consumers that don’t invest in an ethical fund question whether these options are truly ethical.

How Tesla and Deutsche Bank cases have led to ESG criticism

There are many examples of companies greenwashing or funds not living up to the expectations of ESG investors. Recently, the cases of Tesla and Deutsche Bank have led to debates about what ESG means and if it’s as effective as investors would like.

Tesla was dropped from an ESG stock index

Electric vehicle maker Tesla made headlines when it was dropped by major stock index, the S&P 500 ESG Index. While Tesla rated well on many environmental factors, issues around social and governance meant it was removed from this list.

What caused controversy was that the index continued to include oil and gas company Exxon Mobil. The news led to Tesla CEO Elon Musk labelling the ratings a “scam”.

There are several reasons why this happened, including some ESG criteria taking a “best in class” approach to rating firms. So, while Exxon Mobil contributes significantly to climate change, compared to its peers it’s performing well on ESG criteria.

Deutsche Bank faces a greenwashing investigation

Investment banking company Deutsche Bank was raided by German law enforcement on suspicion of fraudulent advertising of sustainable funds at its DWS unit. A former employee alleged that the business engaged in greenwashing.

While the investigation is ongoing, the case raises some questions about how funds and investments are labelled to entice investors, and the evidence used to rate firms against ESG criteria.

Could these cases have a positive effect on the ESG industry?

While cases such as Tesla and Deutsche Bank could harm investors’ perception of ESG investing, they could also help drive the industry forward.

There have been calls for standardised reporting and greater transparency for both companies and funds in the sector. Such high-profile cases could be a catalyst for positive change, with investors now more likely to scrutinise the ESG investments they hold.

At the moment, businesses and funds have very different criteria or ways of communicating, so it can be difficult to compare different investment opportunities against ESG factors.

However, greater transparency means ESG investors can have more confidence that the options they choose more closely align with their goals.

3 ways you can spot greenwashing when investing

If you’d like to discuss incorporating ESG factors into your investment decisions, please contact us and we’ll help you create a portfolio that not only reflects your values but your personal goals too.