How to spot ‘greenwashing’ in your ESG investments

Sustainable investing has ballooned into a $44 trillion industry, but regulators are just starting to crack down on hyped-up claims.

Investing according to environmental, social and governance (ESG) principles emerged as a major focus of COP26, the United Nations Climate Change Conference, which wraps up on Nov. 12.

But the international rendezvous of government and industry leaders has also become a catalyst for criticism about so-called “greenwashing” in the financial industry.

“Sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community,” Tariq Fancy, the former chief investment officer of sustainable investing at financial giant BlackRock wrote in an opinion piece for USA Today in March.

Sustainable investing has ballooned into a US$35 trillion (CAD$44 trillion) industry, according to the Global Sustainable Investment Alliance. At the start of 2020, more than a third of investment assets managed globally were classified as sustainable, the organization estimates.

Driving that growth is demand from both small and large investors for more focus on ESG factors in addition to profit, says Jan Mahrt-Smith, an associate professor of finance at the University of Toronto.

The hype about ESG investing, though, doesn’t always live up to reality, he cautions. Making sure your financial portfolio is in line with your values usually requires some legwork, he adds.

ESG metrics help evaluate firm performance based on sustainability priorities. The “E” stands for “environment,” reflecting a focus on aspects like resource use and pollution; the “S” stands for “social,” which looks at issues like a company’s treatment of its own employees or labour practices within its supply chain. The “G” stands for “governance,” which draws attention to questions such as gender diversity within a company’s board of directors.

The idea is to rate companies based on how they’re doing on those dimensions, in addition to traditional ratings based on information about financial returns and risk, Mahrt-Smith explains.