In a previous blog, I shared my difficulties in finding a sustainable investment fund. This experience, as well as some recent developments, has prompted us to look more deeply into greenwashing in investment funds, which are the worst offenders in terms of the products the finance industry offers.
Lost in a sea of greenwashing
What is greenwashing? Well, it originally meant overstating the environmental features of a product. But the word has evolved to also refer to sustainability in general. This can mean anything from carbon emissions to workers’ rights to good corporate governance. Even EU agencies now use ‘greenwashing’ in this broad sense.
Often, it’s ‘sustainable’ investment funds that are not sustainable at all
Often, it’s ‘sustainable’ investment funds that are not sustainable at all. For example, the ‘Great Green Investment Investigation’ of 2022 showed that 49% of sustainable funds offered in Italy and 43% in Luxembourg contained investments in oil companies like Shell, BP or Saudi Aramco, airlines like Air-France-KLM and Lufthansa, and coal mining companies like RWE or Glencore. According to Faire-Fonds, a big share of the 284 funds they found to have invested in Shell are classified as ‘sustainable’.[1]
As our Dutch member Consumentenbond has illustrated, companies like Shell have profited massively from the rise in fossil fuel prices due to the Russian war against Ukraine. The fossil fuel industry is already disproportionately profitable, which is why it is frequently included even in sustainable investment products. Windfall profits are going to exacerbate this problem. One more reason for sustainability-minded investors to shun them.
Big promises
Unsubstantiated marketing promises compound this issue. For example, when asset managers claim to invest according to the highest ethical and sustainability standards without providing any information about their selection criteria.
Banks and asset managers can also greenwash themselves – not just their products
Banks and asset managers can also greenwash themselves – not just their products. Studies by our members and other organisations have found that pledges by financial institutions subscribing to net zero initiatives – like the Principles for Responsible Banking or the Glasgow Financial Alliance for Net Zero – are just hot air. They continue to finance fossil fuels and other unsustainable business activities.
Then there are investment products that promise ‘impact’. Many retail investors wish to avoid doing harm, but they also want positive impact via their investment decisions. Many products claim to do so, but these promises are frequently questionable. That’s because the very notion of impact is (not yet) well-defined, let alone measurable.
It’s time for the regulators to regulate
The good news is that the European Commission and EU financial supervisors have woken up to the issue.
For example, the European Securities and Markets Authority has proposed rules to govern sustainable-sounding investment fund names.[2] The basic idea is that funds with names like ‘green’ or ‘climate’ must have a minimum of sustainable assets. Well-designed and enforced rules for sustainable financial products would make it easier for consumers to find truly sustainable investments and fight greenwashing.
However, any new rules need to go further than the status quo because the existing ones actually enable greenwashing. They are often vague – especially the Sustainability-Related Financial Disclosures Regulation (SFDR) – and do not properly define minimum requirements for different types of sustainable investment products.
For example, the SFDR talks about ‘contributing’ to environmental or social objectives, but this can mean many things. In which case do I contribute? When I avoid investing in companies that cause social or environmental harm? Or when I invest in those same companies, but with the intention of pushing them to become more sustainable?
Change is coming…but not just yet
Unfortunately, we will not see ambitious regulatory action to tackle this problem effectively before the European elections in 2024. But we will keep pushing for an ambitious new law early in the next European legislature that will enable retail financial customers to make well-informed decisions.
This should set minimum requirements for sustainable investment products and develop product rankings or labels to inform consumers what they are buying. These changes would have a real impact for consumers, helping them to navigate the different sustainable investment products.
Personally, I am counting on things improving. This so that the next time I want to invest some of my savings, I can do so knowing I can make a truly sustainable choice.
[1] Faire-Fonds does not examine the entire universe of investment funds, but only (i) those that are offered to investors in Germany and (ii) those that are marked as ‘sustainable’ in a relevant database. The actual number is therefore likely to be higher.