Podcast: What is greenwashing and what to do about it?

Claire Herbert: Welcome back to the Schroders “Making An Impact” podcast. In today’s episode we will be tackling the hot topic of greenwashing.

I’m Claire Herbert, ESG Manager for Asia Pacific and I’m joined today by my teammate Anastasia Petraki, Sustainability Investment Director based in London. Hi Anastasia.

Anastasia Petraki: Hello

CH: So, Anastasia, in recent years we’ve seen a growing interest in ESG. More people are looking to invest into sustainability, fund managers are launching sustainable products to meet that demand and more companies are becoming “people and planet friendly”. But when you look at the data from our annual Global Investor Studies, we’re still seeing that concerns around greenwashing, no standard or common language and lack of data continue to be the biggest barriers stopping people from investing sustainably. So Anastasia, what’s going on? What’s the problem here?

AP: Well, these two things are connected. As long as investors feel that there is not enough transparency and data, they will be worried about greenwashing.

Greenwashing in terms of definition is intentionally misleading communication that overstates the sustainability or greenness of an activity, a company or an investment product.

There are two reasons why it is a concern.

First, if we are talking about greenwashing at an activity or company level, the risk is misallocation of capital. This means that money intended for sustainable purposes goes to activities that are not really sustainable. This leaves less money for those activities that can create a more sustainable economic system. So the economy does not progress and this also harms confidence in sustainable investing. This is bad news for everyone.

Second, if we are talking about greenwashing at an investment product level, then the risk is mis-selling. That is, people buy products that are making promises that they can’t possibly deliver. This is a failure for consumer protection. Indirectly, it too robs sustainable activities of necessary funding.

CH: Right, and things are not always so black and white. Sometimes greenwashing can even be unintentional. Scope 3 emissions are a great example of this. Scope 3 emissions are those that exist up and down your value chain, they are still linked to your business, but they are pretty indirect in terms of the control you have and the access to measure and quantify that. And so companies and funds still have to rely heavily on estimates to produce those numbers because it’s difficult to know exact emissions. Take an example of a car manufacturer, the emissions from people driving those cars would be part of that company’s scope 3 emissions. Of course, you can’t know the exact emissions from driving every car that they produce, and so you have to make estimates. These estimates may not be an accurate reflection of reality, but that is not necessarily done on purpose. It is done on a best-efforts basis. But having a rough picture is better than no picture at all.'

AP: Exactly. The solution is not to avoid reporting altogether. It is rather to recognise that the numbers are imperfect and be clear on the limitations and assumptions involved in the estimation. 

Regulators around the world are trying to manage these issues by looking at how to increase clarity and transparency around sustainable investment.

CH: Yeah, in Asia Pacific we are seeing a lot of activity. Singapore, Hong Kong and Taiwan are introducing various investment product disclosures, Japan is introducing climate disclosures for listed companies and China’s made a head start on developing a sustainable finance taxonomy… to name a few. But despite each market creating their own requirements, they’re ultimately all working towards the same objective, right?

AP: Yes, and they actually do have a dual objective here. The first one is to create an environment that makes it easier to channel private investments towards products and services that will make the economy sustainable faster. And the second one is to help prevent greenwashing.

Looking at the different sustainable finance agendas that governments around the world are pursuing, it is clear that the most common building blocks are three:

• The first, a taxonomy classifying which economic activities are sustainable,
• Second, a regime that asks for additional disclosures for investment products that do have sustainability features
• And third, company reporting to ensure that the market gets the data around sustainability risk exposures, and how companies are tackling them.

Regulators and policymakers are making transparency the number one priority for sustainable finance because similar to investors, they see lack of common understanding and data as a potential barrier to further growth in the market.

CH: But then there’s the big question about whether these disclosures and this additional transparency actually helps.

You can provide information on board gender diversity and carbon emissions, but there will always be differences in opinion on what deems a company or an investment product to be sustainable. And a big question still lies over how to tackle transitioning companies that may not look great right now, but are making big efforts to get better.

Environmental, Social and Governance covers a pretty broad set of factors, and different metrics are going to bear different importance depending on the type of product you are looking at or the investor’s priorities and preferences. It’s not easy for regulators to decide which metrics to disclose, because more information is great, but we don’t want to overburden companies and the fund managers with administrative disclosures, especially when methodologies and understanding of all of this are still in their early stages.

AP: Exactly, and another interesting complication is what do we actually do when you have all this extra information. What we have seen so far is that there are different perceptions of what is greenwashing.

The first one is about how we defined greenwashing earlier, so basically you must say what you do, nothing more, nothing less. You should not mislead or overstate your sustainability practices, full stop. But the second one is more complicated. If you say exactly what you do and you don’t have anything misleading in your communications, then the question becomes, is what you are doing really sustainable? Have you set the bar high enough? This is a question that we have seen coming out particularly through Europe’s Sustainable Finance Disclosure Regulation where different opinions have floated on what type of product can be deemed “sustainable”. Everyone uses a different approach, but does this mean that some are greenwashing if they are all being clear in their communication on what their approach is?

CH: Yeah, it’s not an easy question to answer. So with that in mind, where do we go from here? Even with all the new disclosures coming in, we still see a lack of understanding and trust. Consumer research tends to indicate that retail investors either don’t engage with this information or don’t understand product disclosures and end up looking at the individual underlying holdings as a “shortcut”. So if you hold company ‘X’ in your fund and I’ve just read an article about a controversy involving company ‘X’, then I might not think that you’re sustainable. And in the same vein, many investors turn to third party ratings as a “second opinion” or to get some external validation on stuff being reported by a company or investment product. If that rating seemingly lines up with what’s being reported then that’s all good, but if not, there is a risk that people assume there’s something wrong with the reporting, rather than something wrong with the rating. And let’s not forget here that ratings are just another single subjective opinion on ESG, not the be all and end all for deciding what is or isn’t sustainable. So, what next? Where do we go from here?

AP: We must continue with our efforts. We need both the discipline from those who report and communicate about their sustainability, and we need to empower those who use these reports and communications to understand and challenge.

The perennial question is ‘does a product do what it says on the tin?’ We need to improve the language we use. We also need to accept that it will be hard to get 100% comparability because sustainable investment is an umbrella term to cover many different approaches.

There won’t be a magic fix or a single number or rating. So further digging and homework will always be required, and our job is to make sure that all the necessary information is available to allow for this level of external scrutiny.

CH: Thank you, Anastasia. If our listeners take anything away from this episode, I hope it’s that there is no simple solution to greenwashing, but it’s really important to understand what product you’re actually getting before you invest.

AP: Yes. It’s not easy and requires transparency and education, as well as looking for evidence to support any claims made by that product.

CH: A really interesting discussion, we’ve only scratched the surface but that’s all we have time for today. Thanks everyone for listening.  I’m sure there will be more to come on this topic and many others so keep an eye out on our website and socials to learn more from Schroders about sustainability and making an impact.