Greenwashing

The sins associated with it

Every business in whatever form or sector uses natural, social, as well as human capital, in order to create its products and services, and to sell them. But unfortunately, these assets are not captured on the company's balance sheets; it only considers financial assets and liabilities.

We also note that investor preferences have changed in the recent years, and every institutional investor and asset manager is looking for ‘green assets’ or ‘ESG rated funds’. There are many institutions that are offering such financial products. This is mainly to create a favourable view of their products and hence develop a better market share. 

Unfortunately, there is no general understanding of what ‘sustainable’, ‘green’, or ‘ESG rated’ means to the investor. Hence, most of these frameworks are not watertight. For someone putting in an hour’s worth of research can pick several holes in such frameworks.

Recently, IOSCO did a survey of asset manages and found that 51% of those asset managers were signatories to the UN Principles for Responsible Investment, but still showed little evidence of appropriately integrating responsible investment across their portfolios. Secondly, a number of the asset managers had signed up for the TCFD disclosures, but they have not yet published a report for their own businesses, and among them, only 38% of those asset managers are expected to produce a report in the next reporting year. So the remaining ones haven't even thought about it. I call it ‘the green in name category’

Another one we often see is the superficial green…this is by far the largest category of all. An example of this is a Head of Sustainability, a Head of ESG, or a ESG committee with no powers over the operations of the firm…..ethical profesionals should shun such puppet roles, except if they are neck deep in debt and take the role for a couple of months to pay their bills. Another example is a fund which has ‘ESG’, ‘green’ or ‘sustainable’ in its name, but its prospectus says that it will derive maximum returns by investing in equities…no mention of ESG.

The third type is an unclear green (or impact washing) which uses an even more diluted form of an ESG framework. Some of these investment vehicles are floated by highly reputed institutions, and state, among other things, that they will use shareholder proposals, proxy voting, and/ or corporate engagement to achieve their impact goals. This incremental improvement, is likely to materialise a few decades after you had your meeting with the maker,assuming you just started your first job when you selected this fund. A glance at the holdings of such funds reveal fossil fuel, mining, and other carbon intensive sectors as the predominant part of the portfolio.

Then you have the fourth category, which is basically an eyewash, more than a green wash. These funds state that they use a negative screening criteria to exclude certain sectors, but if you bothered to look at their holdings, you will see oil & gas securities hiding in plain sight. I am not against holding oil and gas securities, but I don’t consider it green, by any means of imagination.

What these investment vehicles do, in reality is to dupe investors into a false sense of altrusim, while driving prices upwards and creating greater volatality. What happens when this bubble bursts, is upto your imagination.

Can these monies be directed towards reducing inequality?

Are you aware of any other means of ‘greenwashing’ ? Please comment and let me know.