Despite the growing popularity of ESG investment funds, ‘green’ investments are not always as environmentally-friendly as they appear.
In order to address this issue, often known as greenwashing, the US Securities and Exchange Commission (SEC) introduced new rules in 2023 to prevent misleading or deceptive investment fund names. This amendment to the Investment Company Act “Names Rule” stipulates that 80% of a sustainable fund’s portfolio must match the asset advertised by its name.
It sounds obvious doesn’t it? But it hasn’t always been the case. In fact, for years, many ESG funds have been padded with investments that aren’t green at all in an effort to offset low-return investments and provide optimal returns for investors. Now, these new amendments demand more transparency in fund names, as well as additional reporting and disclosure requirements, in an effort to halt this deceptive behavior.
In this article, we’ll take a closer look at greenwashing, how the SEC is cracking down on greenwashing companies, and review the key steps your organization can take to avoid greenwashing and improve accountability.
what is ESG greenwashing?
Unfortunately, the concept of greenwashing, and its closely-related cousins purpose-washing, cause-washing and climate-washing, isn’t new in the ESG space.
Greenwashing is the act of making false claims about the environmental or climate impact of your goods or services. It also occurs when businesses spend more money on marketing their supposed positive environmental impact, than actually taking action to make a difference.
In fact, the UN says greenwashing poses a significant barrier to tackling climate change, promoting false solutions to the climate crisis that distract and delay concrete and credible action.
So, why do companies greenwash? In fact, there are diverse reasons and greenwashing can manifest in different ways including:
- Companies purposefully withholding information or being vague about their operations or impact
- Businesses saying they have a robust ESG strategy or standards in place, when in reality they don’t
- Organizations overstating the impact of small improvements they’re making towards sustainability
- Companies making unverifiable statements due to missing steps in the due diligence process
- Organizations focusing on one positive impact they’re making to distract from non-action or harmful actions
- Businesses making false or misleading marketing claims to increase the perceived value of a goods or service
- In the investment industry, greenwashing makes it difficult for investors to distinguish between funds that are using truly green strategies and those that are just claiming to do so. Sadly, studies have shown this practice to be rampant.
In fact, after analyzing 515 climate- and ESG-branded investment funds, the ESG Book found that:
- Seventy-three ESG funds (14%) showed a “greater emissions intensity ratio” than the average recorded across 36,000 total funds; and fifteen ESG funds (3%) “exceeded 400 tons of carbon dioxide equivalent per million dollars of revenue – more than twice as high as the wider average”.
Additionally, they found that many of the 95 climate-specific investment funds analyzed were actually investing in fossil fuel and mining companies, which goes against the principle of net zero even when these companies have their own offset programs in place.
why is greenwashing hard to combat?
The main challenge around greenwashing is that, to date, there has been no one single definition or means of measuring it.
That means greenwashing can look different based on the product or service in question, the industry it is serving, or the values of the person making the claim. In an article from Harvard, for example, the authors state bluntly: “one person’s treasured sustainability claim can be another person’s greenwashing trash”.
Moreover, accusations of greenwashing have, so far, been relatively easy for companies to skirt around. Without requirements to disclose numbers, science, or the full story, it’s been easy for businesses to overstate, exaggerate or be non-specific about their environmental impact in favor of their bottom line.
Recent developments by various bodies, however, including the SEC, mean greenwashing is coming with increased regulatory, reputational and litigation risks.
Every day, more companies are being called out for greenwashing, and it’s easy to Google lists of accused offenders compiled by environmental watchdog organizations. This signals that consumers – and investors – are becoming more savvy to deceptive practices and many want change.
what is the SEC doing about greenwashing companies?
For some time now, the SEC has been discussing mechanisms to crack down on greenwashing.
In March 2021, the SEC formed a Climate and ESG Task Force with the aim of using existing laws to fine companies involved in greenwashing and to proactively identify ESG-related disclosure and investment misconduct. Although enforcement was proving difficult due the fact that greenwashing remained undefined, the SEC started fining companies for making misleading statements about their ESG funds.
By August 2023, the SEC was issuing subpoenas and launched investigations into several assets managers relating to their green marketing claims. Then, in September 2023, the SEC announced its amendments to the “Names Rule” signaling a deeper crack down on greenwashing. These changes modernize the Investment Company Act of 1940 to promote enhanced transparency, accountability and integrity.
During the announcement, SEC Chair Gary Gensler commented, “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
As a result of the amendments, any funds that use words like “green”, “sustainable”, or “ethical” in their name must ensure that at least 80% of its investments are actually invested in a way that aligns with that name. Funds are now also required to review their assets at least every quarter to ensure they’re meeting this threshold, and if they are found to be out of compliance, they have 90 days to rectify it.
Finally, the amendments also roll out new disclosure and record keeping requirements, including:
- Enhanced prospectus disclosure requirements for terminology used in the names of funds
- The requirement that any term used in a fund name that suggests an investment focus must be consistent with that term’s plain English meaning
- Additional record keeping requirements for compliance with names-related regulations
Although some argue that the new requirements may end up wiping out ESG funds, or cause confusion among investors by encouraging superficial judgments based solely on names, the SEC’s crack down on greenwashing of ESG funds isn’t going away anytime soon so it’s a good idea to eliminate this risk.
moving forward: how to avoid greenwashing at your organization
The SEC isn’t the only player posing a legal risk for investment funds involved in greenwashing. State-level legislation is also being passed to combat ESG misinformation and globally, there is an increased requirement for ESG reporting through frameworks such as the EU’s Corporate Sustainability Reporting Directive. Finally, environmental activists are increasingly bringing alleged bad actors to the public’s attention, creating difficulties for those involved.
The takeaway? Greenwashing is risky business. Luckily there are several steps your organization can take to avoid greenwashing and increase accountability as follows:
1. commit to transparency
When it comes to avoiding greenwashing, a true commitment to transparency is the first step. Don’t disseminate vague, non-specific claims that leave people with more questions than answers. Instead, share concrete claims openly and honestly and make sure your information is backed up with verifiable evidence, data and metrics.
Additionally, don’t just share your wins. Being transparent about both your achievements and shortcomings is what builds trust. If you didn’t meet a target, be honest about it, take ownership and show how you’re working to achieve it.
To support your efforts, consider creating a scorecard, dashboard or even microsites – like the ones offered by the AMCS Sustainability Platform – to keep your progress front and center, and enable your company to share important information with stakeholders.
Transparency equals trust, and trust builds loyal customers. Though greenwashing might be tempting for short-term wins, it’s long term loyalty and brand equity that move the dial.
2. collect auditable, investor-grade data
It’s easy to make statements like, “we’re committed to protecting our rivers and oceans for generations to come” or “we stand for climate action, now”. However, most consumers are waking up to the fact that those sorts of statements are often indications of greenwashing.
Instead of making marketing-speak claims, set a few realistic KPIs and work towards them. Collect auditable, investor-grade data about them. Start with KPIs that you know you can track, and make sure your data is rock-solid. Don’t try to tackle too much at once, or your data might be too thin.
With a tool like the AMCS Sustainability Platform, you can manage your data easily by centralizing data collection, calculations and analytics. You can even automate reporting and track your progress along your whole supply chain.
3. be consistent
When a product rebrands their packaging to use green tones, add natural images or include logos of unverified certification programs, it can be an indication of greenwashing.
It’s easy to change up your branding, put out ads about how green you are, and share a news story or two about a donation you made. But, it’s much harder to do the real work, and share your efforts on a consistent, year-over-year basis.
A true commitment to ESG isn’t a one and done exercise. It can’t be accomplished in a quarter. And it certainly won’t come about through a packaging design change. The better approach is to put the work in, track your progress over months and years, and share this honest and verifiable information with your stakeholders on a regular basis.
With steady, consistent progress, the market will notice your efforts and you’ll build credibility and trust that adds lasting value to your organization.
fight back against greenwashing today
As the regulatory, reputational, and litigation risk of greenwashing increases, there are many things your business can do to develop an ESG program based on accountability, transparency and trust. AMCS can help you get there.
To see how AMCS can automate and streamline your ESG data collection, management, and reporting processes, reach out today and speak to one of our experts today.