Author: Matthew Klein, CFP, CSRIC, CRPC

With ESG steadily gaining popularity, it is important to distinguish companies who truly follow ESG values from those who use it purely as a marketing gimmick through greenwashing. Sadly, the latter happens all too often, especially in the financial services sector.

To understand the difference, you must first learn: What is greenwashing? What is the firm’s true values and do they align with their “ESG” message? And lastly, what is true ESG and Sustainable Investing.

Greenwashing:
According to Eco Watch, “Greenwashing is a common marketing ploy designed to make products seem more sustainable than they are. It’s essentially a way to convince customers that a company is making positive environmental choices, often through eco-conscious verbiage designed to convince shoppers that the product is more natural, wholesome, or free of toxins than competitors.” Merely saying these things is, in fact, fine, however it becomes greenwashing when none of the above is actually true and in fact, is a way to play on people’s values towards sustainability to gain a financial or marketing edge.

The first mention of the term greenwashing is found in 1986 by Jay Westerveld. Westerveld criticized the hotel industry’s “Save your towel” movement which encouraged guests to reuse towels in the name of water conservation. On face level, this seemed like a noble cause.

However, after digging further all this actually accomplished was saving the hotel money due to reduced laundry costs while having minimal to no actual impact on water conservation.

Other examples can be found in the marketing of major US banks. One prominent bank has company “swag” that states they purchase green power as part of their “commitment to the environment.” However, that same bank is prominently on the list of the top 50 Fossil Fuel lenders. They use their false ESG values as a marketing ploy while simultaneously funding the exact opposite and profiting of the fossil fuel industry. That doesn’t sound very committed to the environment to me. In this example, we can see that the companies’ “values” do not actually translate into their day-to-day operations.

How do we decipher the difference?
With all the greenwashing in several companies marketing strategies, how do we the consumers and investors decipher the difference? This is actually simpler than you would think. In the example above about the large US bank, their fossil fuel funding record is actually public knowledge and can be found in the Banking on Climate Chaos 2021 report here. We, consumers and investors, must do our own research into what is actually behind the massage. The data is out there if you just look for it.

The same is true for companies that praise diversity. A simple check of their executive committee and board makeup will tell you all you need to know if those claims are sincere or not. For companies that speak out against human rights abuses, well you can examine their supply chain to see if they are actually contributing to this oversees (looking at you “Woke” companies who utilize a supply chain that contains child labor, slavery, and vastly poor working conditions).

All in all, these companies need to put their money where their mouth is. Simply saying you want X without actually taking any concrete steps to attain it is simply a marketing ploy. Sadly, this overshadows the many great companies who actually are taking steps to address various ESG issues. There are many banks that have ended fossil fuel funding. There are many companies that closely examine their supply chains. And there are many companies that have made concrete changes to their executive and board makeup to include people from diverse backgrounds. On face level, it is difficult to separate those who make a change from those who just say they will, but by diving deeper and researching what goes on behind the marketing you will be able to see who actually measures up to their ESG values.

Greenwashing in the Investment Industry
The same greenwashing marketing tactics used by other industries are magnified in the Wealth/Asset management industry. According to USSIF (https://www.ussif.org/sribasics), $1 in every $3-4 dollars is being invested into “ESG” products/strategies. However, the definition of what ESG investing is can be very loosely defined. Practically, any firm can call its fund an ESG investment. This is because there is currently no regulated definition of what constitutes an ESG investment, and to be fair ESG does mean something different to each individual. However, there are often times when those funds are clearly not suitable for ESG consideration.

What is True ESG/Socially Responsible Investing

ESG/ socially responsible investing is an inclusionary process where investors find companies that are leaders or becoming leaders in their respective industries and are working to set an example that becomes the baseline of industry standards. Instead of relying on subjective biases, this process should rely on realities that are objectively true and any sensible person would agree are for the better.

Can it really be contended that diversity in the board room wouldn’t lead to a more fruitful collection of ideas? Should a CEO not be held accountable for the performance of his or her company while continuing to get paid exorbitant bonuses? Is there an excuse for a company operating overseas to use slave labor to make their products just because there are more relaxed labor laws? These questions are asked quite frequently and while companies claim that they are taking proactive steps to mitigate these issues, quite often its marketing terms glued together. True ESG/Socially Responsible Investing is about looking at organizational processes under a microscope and looking at not only looking at what is being done currently but to also look at how a company addresses new issues and what is being done to mitigate it. Essentially, ESG is a framework of thinking that includes all stakeholders. It includes clients, shareholders, communities, the environment, and supply chain. It recognizes the responsibility that corporations and the action that is needed from them to set reasonable standards.

If conducting research, yourself, look at the human rights and supply chain reports as well as other socially responsible reports that the corporation publishes. Review what shareholder advocacy groups (ex: US Sif, As You Sow, ICCR) are saying about the company, look at their past and current engagements. And lastly, Google the company, look at reputable articles and get a view of the company’s reputation.