Greenwashing: What Is It? How to Avoid It? And Some Greenwashing Examples in 2022
When looking for greenwashing examples in 2022, I didn't have to look too hard. Like many observers of the financial markets, I was stunned when some leading ESG index funds, managed by top firms like Vanguard, Black Rock and State Street were caught out by Russia’s invasion of Ukraine this past February. These funds have a mandate to invest only in companies that meet high ESG standards yet they owned shares of Russian energy giants Gazprom and Rosneft, which are not simply big fossil fuel companies, they are also notorious for their poor treatment of shareholders and their problematic safety records. Both are majority-owned by the Russian government, whose interests they have consistently put ahead of those of other stakeholders.
That these index funds were marketed to investors as more sustainable investment vehicles that applied Environmental, Social and Governance standards to the companies whose shares they bought, is an egregious example of “Greenwashing”.
What Does Greenwashing Mean?
Essentially, Greenwashing is the process by which an investment is presented as more sustainable than it actually is. Greenwashing is unethical because it misleads investors into believing that they are investing sustainably when they are not.
I was first introduced to this term about fifteen years ago when I was looking at the initial public offering of a Brazilian biodiesel company. The company was making biodiesel from soybeans for distribution to large-scale consumers. Management told a beautiful story about how they were developing an alternative way to make biodiesel from a plant called jatropha that thrives in the poor soil and dry climate of Brazil’s impoverished Northeast, where it would not be displacing food production and would be providing employment to poor rural communities. A colleague of mine scoffed at this and declared that management was “greenwashing us”. She was right. The jatropha biodiesel production with all of its expected environmental and social benefits never materialized.
What got some top fund managers ESG funds in trouble in 2022 was not greenwashing by individual companies: Gazprom and Rosneft have never pretended to care about Sustainability or any shareholder other than the Russian government. Instead, the issue is the index against which their funds are managed. An index fund is passively managed, meaning that it reduces costs by simply buying everything in a particular index, without doing the extra work needed to distinguish between stocks. Unfortunately, many of the leading ESG index funds track one of the MSCI ESG indices and MSCI practices greenwashing.
I first realized that MSCI’s ESG indices were not what they purport to be in 2020 when I was looking at some index funds managed by Black Rock (MSCI’s corporate parent) for a client who was in the process of making their investment portfolio sustainable. To my surprise, Black Rock’s “ESG Aware index funds owned not just the aforementioned Gazprom but also Exxon Mobil and other fossil fuel companies. I reached out to Black Rock to get an explanation and a very helpful analyst there explained that the MSCI indices they used only screened out the most carbon-intensive fossil fuel stocks such as coal and Canada’s oil sands. In addition, the index doesn’t actually take social and governance factors into consideration at all.
In late 2021 Bloomberg did an in-depth investigation of MSCI’s ESG ratings and found that they are based not on how companies perform on ESG factors but rather on whether or not these issues risk hurting their profits: “MSCI, the largest ESG rating company, doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.”
Gazprom, therefore, qualifies for the MSCI ESG indices because no one in Russia cares about its carbon intensity, the environmental damage it does, its poor safety record and its terrible treatment of shareholders. But sustainable investors do and in buying ESG index funds that use MSCI’s indices they are becoming victims of greenwashing.
Greenwashing Examples in 2022
As sustainable investing has become more trendy, greenwashing has become more widespread, and greenwashing examples in 2022 are easier to find. Mainstream investment companies with little to no history of sustainable investing have rushed to introduce investment vehicles with a sustainable or ESG label that may or may not be accurate. News came on June 10th that the SEC is investigating ESG claims made by Goldman Sachs Asset Management. In Europe, an investigation into greenwashing by German fund manager DWS has already led to the departure of its CEO.
How to Avoid Greenwashing?
For the average investor, the greatest risk of greenwashing is in index funds. Passive investing and sustainable investing do not always go well together. Investors need to look carefully at any index fund that calls itself “ESG” or “Sustainable”, starting with identifying the index it tracks. Actively managed funds are more expensive but the higher fees pay for due diligence on ESG issues. Many of the most reliably sustainable funds are managed not by the big investment companies but by smaller ones that have specialized in sustainable investing for a long time.
Individuals can research the ESG ratings of funds on the website of the non-profit As You Sow, while Sustainalytics, among others, publishes ESG research on individual companies.
Of course, the easiest solution is to work with a Registered Investment Advisor who specializes in sustainable investing.
Urban Larson
Principal
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