Lotte writes*
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.
* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).
Practically speaking, it would be amazing if at the end of your Research paper you write recommendations/examples of ESG funds that have strict measures.
One, to help me find good investments, and two as “best practices” for other funds to follow.
Moving forward, it might be interesting to look at and compare the different categories of ESG investments. Some funds focus solely on companies doing good at gender equality, others on low-CO2 companies, others are way more general. And a crucial distinction seems to be that some funds work by excluding “bad” companies, while others select the “best” companies in that area. Just some food for thought 🙂
Also, something I was thinking about is how ethical is it even to invest. I mean, this comes to my mind because of a couple of potential issues.
1- In general we are expecting growth by our investments, which might somehow conflict with our a-growth ideals.
2- In a sense, investing is like voting. So voting on greener companies makes more sense. But at the same time, the whole expectation-based volatility of the stock market might not be amazing for long-term sustainability.
3-What’s up with investing in developing markets, knowing that they might be corrupt and so on…
5- Think comparability. Are the funds choosing companies that are good at something (they are making an effort), or simply comparably better than others (the least worse of all the fossil fuel companies for example).
4-… I’m sure you can come up with more ethical dilemmas…
Dear Jan,
this was a very interesting article. I have some tea give questions that I would be interested in having answered in an essay, which might be outside your essay scope. I would be interested why farmers do not switch to high profit crops (e.g. are there barriers to entry etc.)? That, however, would also not be a solution as someone needs to feed Peruvians. The second question I would find interesting, is on the potential for a new green revolution. Could the FAO in a concerted effort with the Peruvian government adopt ‘more efficient’ crops of the same type (e.g. same types of crops only grown to grow more efficiently etc.)? I read somewhere at some point that there were similar intentions for Africa.