In March 2021 Tariq Fancy, the previous chief investment officer in the department of ESG investing at BlackRock (the largest asset manager in the world), published an opinion article in which he essentially stated that ESG investing is “little more than a marketing hype.” (ESG stands for “Environment, Sustainability and Governance.”) He exposed parts of the industry by claiming that some companies who label themselves as ESG actually do not act sustainably, and some even invest in fossil fuel companies and other polluting industries. His piece caused a flare-up in discussions around ESG investing and the greenwashing that it has caused.
Greenwashing happens when funds present themselves to be sustainable when they are not to attract more investors. The rise of greenwashing amongst funds has risen because of the rising profits in the ESG market. ESG funds and ETFs are becoming increasingly profitable, reaching record-breaking heights last year. This increased attractiveness of ESG is reflected by a large increase in funds rebranding themselves as ESG. However some of these rebranded funds are not as green as they want others to think. Firms are able to greenwash without repercussions because concrete rules and checks are lacking, allowing them to publish incorrect or manipulated data.
One might think that because there are no current regulations, greenwashing can’t be that harmful. However this is a dangerous assumption considering we are nearing a point of no return with climate change. Greenwashing presents a problem because of two reasons: First, it causes a barrier for investors to integrate an ESG framework into their decisions, meaning that the potential that ESG investing has in changing consumption goes lost. Second, it puts up the façade of a positive change happening in big firms, when realistically they are still irresponsible producers. Fancy emphasizes the last issue in a call for action addressed to the government, as we are running out of time to take climate action, and we cannot afford to not take action.
The solution to greenwashing seems obvious: a clear set of regulations for what is defined as sustainable and what is not. Luckily it seems that governments and multigovernmental institutions like the EU have also been noticing the issues with the current rules around ESG investment and sustainability labels. On March 10th the EU issued a new set of rules to help define the difference between sustainable and non-sustainable products. The US government also took notice and announced the creation of a Climate and ESG taskforce, which will “proactively identify ESG-related misconduct.” Hopefully the implementation of these regulations will be effective so that ESG investment can keep on expanding in a way that actually makes progress rather than standing still.
Bottom Line: Greenwashing is presenting itself as an big issue in ESG investing. This issue needs to be solved as soon as possible, and the best solution seems to be government regulations.
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