Greenwashing threatens credibility of asset managers

Environmental, social and governance (ESG) issues have expanded into the mainstream of the corporate world in recent years, and an increasing number of asset managers now offer ESG-labelled investment products. However, ‘greenwashing’, in which the environmental claims made do not match reality and are designed to deliberately mislead consumers, can cause enormous reputational damage and threatens to discredit the corporate world in general.

Even some of the largest and most renowned firms can succumb to accusations of greenwashing as they strive to establish their ESG credentials. Half the carbon offsets held by British Gas owner Centrica were recently found to be ‘junk credits’ that were issued under a discredited scheme. Meanwhile, the world’s biggest consumer bank, HSBC, was forced to pull an ad campaign in the United Kingdom after the advertising watchdog ruled that HSBC was touting a tree-planting scheme to offset carbon without acknowledging that it finances fossil-fuel projects at the same time.

In early 2023, Bloomberg said that greenwashing may be the biggest risk to the future of ESG investing. Yet, the agency added, there’s no firm agreement on what it means in a legal or regulatory context. Bloomberg added that ‘it’s typically used when companies, people or governments overstate, misrepresent or just plain lie about their climate credentials.’ ¹

Too many grey areas

The lack of a common definition of greenwashing among the regulatory authorities makes it difficult to stamp out the practice. Bloomberg quotes Maia Godemer, a London-based sustainable finance analyst at BloombergNEF, as saying:

‘The battle to stamp out greenwashing continues to be foiled by the lack of a clear and common definition across jurisdictions. The market can only continue to flourish if regulators build a common framework around what is considered environmentally or socially sustainable.’

Bloomberg adds that while policymakers in Europe have been the most aggressive in trying to flesh out such a framework, the region’s market watchdog, the European Securities and Markets Authority, still struggles to specifically describe what greenwashing is.

EU leads the charge against greenwashing

Nonetheless, efforts to combat the practice have already had a dramatic effect, with many asset managers forced to stop claiming levels of sustainability in investments that don’t meet the new standard. During the second half of 2022, huge asset managers such as Amundi and BlackRock ceased claiming that US$140 billion worth of their funds qualified for the EU’s top ESG designation, known as Article 9.

Fund managers have downgraded more than $140bn in ESG assets