Recognizing Portfolio Greenwashing in Finance
It is no secret that sustainability is becoming increasingly pertinent to both investors and consumers. Although the rise of environmental consciousness in financial services has the potential to combat climate change, the profitability yielded by “sustainability” has incentivised both firms and businesses to greenwash, raising doubts about the real impact of allegedly ESG-driven investing.
Although many firms claim to be climate conscious or aligned with net-zero ambitions, in a 2021 article published by the EDHEC business school, authors find that on average, green data represents a mere 12% of the determinants of portfolio stock weights. Across these companies, the lack of proper standards means that asset managers often display data that lacks either robustness, or actual meaning.
Although the proliferation of greenwashing in finance is a nuanced and complicated problem to fix, authors recommend several ways in which investors can recognize portfolio greenwashing. First, they argue that if climate considerations represent less than 50% of a firm’s determination of a stock weight, the firm should not be able to claim that it is sustainability focused. Many researchers also advocate for the implementation of stricter global standards.
The authors of the EDHEC paper further mention how even in the absence of greenwashing, it is debatable whether current ESG practices in investing actually are able to deliver tangible impact. Most “sustainable” firms simply avoid investing in carbon-intensive industries, a practice that they say may clear the conscience of investors, but likely will not be able to deliver the change required to decarbonize the economy. , the paper has put forward a necessary discussion in regards to the change-making potential of impact investors-investors can motivate portfolio companies to adopt greener technology, clean up supply chains, and improve their production processes.
As sustainable investing becomes increasingly profitable and as such popular, it is ever the more important that investors and consumers alike to not lose sight of the moral motivations behind green finance. This also requires us to be critical of sustainability claims and investments, focusing on the impact, rather than guilt-free investing.