In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.
Study reveals: 6 reasons why retail investors (rightly) fear greenwashing
Investing money while also making the world a little better at the same time is becoming what investors are now striving for. With temperatures slowly rising, biking to work and recycling just don’t cut it anymore. The realization that a sustainable lifestyle also applies to investments is settling in despite the current health crisis. Private investors are starting to understand that they can use their money to support companies that are helping the planet. So, what is standing in their way?
What is greenwashing?
Greenwashing is defined as unsubstantiated claims by businesses to deceive consumers into thinking their products are environmentally friendly. It is a widely-used term, but does it really affect how retail investors think? Here is some research that will show you the answer.
What does the market research tell?
One of the major studies done in this field is by the 2° Investing Initiative (2DII), a non-profit think tank committed to aligning financial markets and regulations with the Paris Agreement goals of limiting the average temperature increase compared to pre-industrial levels to 2° Celsius. Two-thirds of retail investors polled by 2DII state they want to invest sustainably, but there is something in the way. The survey results showed that private investors are skeptical about sustainability products offered by the financial industry due to:
- Fear of greenwashing and not potential lower returns
- Generic claims such as “socially responsible” and self-labeling
- Misleading claims of investment strategies that aren’t actually “green”
- False claims on the composition of investment products
- Misleading claims on the “environmental impact” of the product vs. the impact of the companies actually invested in
- No proof of concrete environmental impact
For instance, 48% of respondents said they are not investing in environmental impact funds because they believe there is greenwashing going on.
Figure 1: Reasons for not investing in environmental impact funds (source: 2°Investing Initiative (2020))
What do the insiders say?
There is only so much research can tell us, but the results of these surveys seem to in line with the general trend. A major critique of investments with environmental, social, and governance criteria for stock listed companies— or short ESG stocks — is the belief that true sustainable investment funds are very rate. It’s a “marketing hype,” as Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock Inc., wrote recently in an opinion piece for the USA Today. He believes that true change isn’t being implemented and says that existing mutual funds are being remarketed as “green” — with no noticeable modification to the fund and its strategies. Being environmentally responsible is now favored by investors and therefore profitable, so funds are labeling themselves sustainable for appearances. Clearly, it isn’t just retail investors that (rightfully) think that there is greenwashing involved in sustainable investing, but also insiders such as Tariq Fancy. But how long can this malpractice of retail investors funds lured into the stocks with limited or no real sustainability impact continue?
What are the lessons for retail investors?
As a retail investor, this should be your wake-up call. When you wish to make a positive change with your money, it is up to you to be critical and do proper research. If the above research has shown us anything is that flashy “sustainable” funds aren’t always to be trusted. Don’t invest in the first ESG fund you encounter; dive deeper and make sure they are truly impacting the planet in a better way. For example, if you really want to contribute to halting climate change opportunities in investing in stocks with 100% positive climate impact can support you channel your finance into the cause you genuinely care about.
- Alicia Adamczyk (2021): Why ‘greenwashing’ is an issue for sustainable investments—and how to avoid it, https://www.cnbc.com/2021/04/23/what-to-know-about-greenwashing-in-sustainable-investments.html
- Tariq Fancy (2021): Financial world greenwashing the public with deadly distraction in sustainable investing practices, https://www.usatoday.com/story/opinion/2021/03/16/wall-street-esg-sustainable-investing-greenwashing-column/6948923002/
- 2°Investing Initiative (2020): A Large Majority of Retail Clients Want to Invest Sustainably, Survey of French and German retail investors’ sustainability objectives, https://2degrees-investing.org/wp-content/uploads/2020/03/A-Large-Majority-of-Retail-Clients-Want-to-Invest-Sustainably.pdf