Intro to an ongoing problem
Saying that you act sustainably or environmentally friendly when you actually do not. Putting a green label onto products to increase sales when they do not live up to their claims. Since a few years, the public debate calls this greenwashing. In its most extreme form it lets a product appear environmentally beneficial when it actually harms the environment. It often comes along with false claims or claims that are hard to prove.
Governments, finance associations and NGOs want to curb greenwashing by improving on transparency and regulation within sustainable finance. However, they face many challenges. The best intentions and efforts may end up having the opposite effect and open the door for more greenwashing.
Summary
Every product that falsely claims to have a positive impact or exploits the malleable definition of sustainability to appeal to misinformed customers that are misinformed may fall under greenwashing. For greenwashing to exist, two conditions have to be fulfilled: Firstly, firms make false claims about a product in its environmental impact. Secondly, customers lack information. In this fashion it is a classical example of a market for lemons.
Greenwashing = Sustainable Framing > actual outcome
Why it exists
Demand creates sales opportunity. A study by the Media Research firm Nielson states that 66% of global consumers are willing to pay more for a sustainable product compared to its conventional counterpart. This incentivizes companies to frame their products sustainably for higher profits. Overall there are two ways to achieve this. Either, you improve your product such that it becomes more sustainable, or alternatively, you make it appear as such. Everyone defines sustainability on their individual terms which opens the door to a multitude of interpretations. If consumers feel that a product is sustainable, they will go for it. Not every consumer bothers about what lures behind the curtain or has the time to crosscheck the evidence behind a claim.
Behind the curtain
Take the example of bottled water. Sales of plastic water bottles increases year on year, reaching an all time record of 70 billion in 2018 (US figures). However, plastic is environmentally problematic to say the least. It has a bad image. This is why water companies start to find smart marketing solutions to avoid losing customers. Here comes the carton bottled water, with claims that it consists of 92% plant based components. Sounds awesome? While this claim is true, only a limited number of recycling facilities can actually process these cartons accordingly. Therefore, many water cartons end up in landfills as well creating similar waste issues like their plastic counterparts. Further, the recycling rate of plastic bottles is 29.2% while it is mere 16% for cartons. Does not seem to be that sustainable, right? A classic example of greenwashing where framing trumps actual outcome.
Financial Greenwashing
The water industry is only one example how industries wash products green. Also the financial industry holds many examples. As investors shift towards sustainable finance, so increases the number of ESG labeled funds. Unfortunately, several “green” funds contain the world’s biggest polluters in their portfolio such as an “impact” labeled fund that contained ExxonMobil.
ESG policies to the rescue?
The European Union boasts itself to be at the forefront of impact investing policies. Money invested in sustainable finance supports this view. EU also claims to tackle financial greenwashing. They clearly outline what sustainable investing is and list requirements for a green finance label. Improved transparency and clear guidelines should enable firms to stick to the rules and customers to be better informed. At its best, green investments will be easier to identify and compare.
On the contrary, some argue that green policies achieve quite the opposite. First, it pushes managers to tweak their numbers or find loopholes until getting that green label. Second, industries and their lobbies influence policymakers to act in their favor. Third, what you perceive as sustainable comes down to your beliefs. This becomes crucial the less you know about the inner working of a product such as an ETF.
The above points are only a teaser on how huge efforts by governments might fall short of your expectations. All in all, there is doubt that green labels will satisfy the needs of demanding stakeholders in a sustainable way. There will always be trade-offs.
Backstage pass
Even though, governments understand the need to tackle greenwashing, finding an effective policy remains challenging. Some policies help to tackle it, some policies even aggravate it despite best intentions. This becomes imperative:
Do not to blindly trust a label or ESG score. Become literate in sustainable finance.
Never invest into a product where you “feel” that it sustainable, because it looks appeals to you at its surface. Instead look for cues that run counter your first impression and dig deep. For example, look closer into the positions of an ETF. What firms could be problematic? Google those alongside the word “scandal” an see how their social responsibility brochure turns out in the real world. Cross check with sources like fossilfreefund.org, fairfinanceguide.de, carbontracker.org, MSCI ESG ratings, Morningstar ESG ratings.
Becoming literate in sustainable finance will be the best way to uncover what smart companies made up to green. The more you know about sustainable finance, the more you realize when claims are greenwashed.
Disclaimer
This article is for information purposes only and does not contain any investment advice. We are no investment advisors. Click the following link to read the full disclaimer.
Resources
https://www.container-recycling.org/index.php/issues/bottled-water
https://wasteadvantagemag.com/carton-council-breaking-through-misconceptions/
https://medium.com/climate-conscious/why-is-greenwashing-still-trending-in-2020-42cf1fa887e1
https://www.ft.com/content/74888921-368d-42e1-91cd-c3c8ce64a05e
https://enveurope.springeropen.com/articles/10.1186/s12302-020-0300-3
https://www.ft.com/content/644c1ec4-39d9-11e9-9988-28303f70fcff