Greenwashing can be hard to detect, particularly when consumers become concerned and businesses stand to lose both trust and revenue as a result of such actions. This information sheet applies to entities offering products with sustainability-related considerations in mind, including superannuation funds and simple managed investment schemes (INFO 155), in order to help them avoid misleading and deceptive practices.
1. Know Your Limitations
Sustainable investing has gained in popularity among investors looking for ways to align their financial goals with their values. One popular method is negative or exclusionary screening, which involves disallowing certain sectors, companies, or practices based on environmental or social considerations.
Greenwashing occurs when companies make false or misleading claims regarding their sustainability credentials. Here is how you can identify it.
2. Be Transparent
Unable to tell financial products that claim to be green from those that actually are, European regulators are taking steps to increase transparency and disclosure of sustainability-related information.
Greenwashing happens when companies set lofty environmental goals without backing them up with concrete actions or results, leading to unnecessary consumption, resource extraction, and waste production, as well as false claims about environmental impact. Sustainable investing means aligning your financial goals with your values and using your money to have a positive social impact. Through transparent investments, you can help prevent greenwashing and promote a genuine sustainability revolution.
3. Be Specific
When it comes to sustainable business promotion, it’s crucial that you be clear and specific in your efforts, or else you may face accusations of greenwashing—where companies make broad environmental claims without properly disclosing their impact on the environment.
With ESG investing gaining popularity, more sustainability-related products have come onto the market. Therefore, it is critical that financial product labels accurately depict its underlying investment strategy, approach to stewardship (if relevant), and asset holdings. As part of its PDS and promotional material, it is equally essential to explain any terminology related to sustainability that appears within these materials in an understandable manner. This is especially crucial when discussing third-party frameworks or publications.
4. Be Honest
Investors today expect companies to demonstrate a genuine commitment to sustainability when making an investment decision, meaning they must disclose their true environmental impact—both current and potential impacts.
Example: If a company sets itself a goal to be carbon neutral by 2100, they should be upfront about its unachievability. While investors and consumers appreciate lofty goals, they also expect tangible progress over time. Greenwashing has become a key concern as sustainable investing grows increasingly popular, undermining trust and diminishing its effectiveness.
5. Be Flexible
Sustainable investing can be good for both the environment and your finances, but this approach does come with risks. In this podcast, we discuss ways to navigate them successfully.
Flexibility is key when approaching products related to sustainability. For instance, when labeling products using sustainable terms like “carbon offsets” or “renewable energy sources,” be certain that this terminology ties back into their investment strategies and asset holdings—otherwise you risk misleading your investors, particularly if selling retail investment products.
6. Be Flexible with Your Data
As environmental issues become ever more urgent, many consumers are searching for eco-friendly investments. Unfortunately, the sustainable investing market can be difficult to navigate; it requires diligence, research, knowledge of best practices, and emerging sustainable investing principles in order to be successful.
Greenwashing is an issue because it skews information required by retail investors in order to make informed investment decisions regarding sustainability-related products and services, undermining market integrity. By providing accurate environmental data in an open manner, companies can circumvent accusations of greenwashing. This may involve engaging stakeholders in their ESG reporting process or using carbon accounting platforms to validate sustainability claims.
7. Be Flexible with Your Conclusions
As sustainable investing becomes an increasingly popular option, it may become increasingly challenging to distinguish legitimate products from those attempting to pass off as sustainable by greenwashing. This challenge becomes especially daunting as markets change and new ESG terms emerge.
An investment fund can be classified as “sustainable” if it excludes investments from companies without adequate worker rights policies, even though its manager does not interact directly with these issuers. This can create both confusion and mistrust in its market. Therefore, we must establish an organized classification (or taxonomy) system for sustainability-related financial products. This should include clear and comprehensive information to assist investors when assessing sustainable investment options.
8. Be Creative
Building a sustainable portfolio involves an assessment of your values and financial goals. Sustainability platforms with third-party verification can assist in keeping you aware of how your investments affect the environment. Companies engaging in greenwashing may face legal ramifications and lose trust from consumers, so the best way to combat greenwashing is through transparency, measurable outcomes, and tools like carbon accounting software.
Investors and consumers are becoming more focused on sustainable investing. They’re willing to pay premium prices for products that fulfill their environmental and social standards; companies engaging in greenwashing may face consumer backlash as well as regulatory scrutiny from either the SEC or the FTC. FTC.
9. Be Flexible with Your Introduction
Sustainable investing has experienced rapid expansion over recent years, driven by millennials’ efforts to align their investment decisions with socially responsible values. Yet research suggests that many young investors prioritize financial profit over sustainability (Formankova, Trenz, Faldik, Kolomaznik & Schnieber 18).
To combat greenwashing, it’s vital that clear guidelines be established regarding how sustainable investment products may be introduced into the market. Asset owners should have access to data that allows them to assess if any particular product’s approach, long-term risks, and opportunities meet their goals.
