4. How to Avoid Greenwashing in ESG Funds

Last Updated: September 2, 2022

Greenwashing––it’s a legitimate concern for any sustainable investor.

Sustainable investors can use funds to align their investments with their values – mutual funds, index funds, and exchange-traded funds. And often, those funds are labeled “ESG.” ESG stands for environmental, social, and governance and is the investment industry’s code for sustainable investing. But in our experience, that ESG label can sometimes overstate a fund’s true commitment to sustainability.

Whether you’re a purpose-driven investor or you’re still figuring out what that means, you want your money to impact the causes you care about most. The last thing you want is to be manipulated or misinformed by greenwashing.

The Bad…and the Good About Greenwashing

The bad thing about greenwashing is that it’s fairly common. The good thing is that most funds are bad at it. If you’re willing to look under the hood, you can usually tell what’s genuine and what’s not. Of course, this isn’t what typical individual investors are used to – we’ve often been told to put our savings into a fund and not look at it or think about it until we retire. But as sustainable investors, we at Till encourage you to trust your instincts and look a little deeper.

The Two Questions You Need to Ask to Avoid Greenwashing

Exposing deceptive funds with an ESG label comes down to answering two simple questions: 

1. Do they say what they do? As in, is it clear looking at the fund’s marketing materials and prospectus what their sustainability strategy is?

This isn’t an idle question. Many ESG funds either don’t know or can’t be bothered to tell you how they assess sustainability. Look for the following kinds of information:

• What do they consider when looking at a company?
• What kind of companies, if any, do they avoid?
• How do they weigh financial data versus sustainability factors?
• Do they hide behind a “proprietary” model that says they use their “discretion” without telling you what that discretion is based on?

2. Do they do what they say? As in, do you see evidence in their quarterly or annual commentary, their holdings, or––if they provide one––their impact reports that they follow the sustainability methodology they claim to? If they aren’t willing to write up how their sustainable investment strategy affected their decisions, or if it’s unclear why they hold the stocks they do, that’s a red flag.

The Greenwashing Bottom Line

This is what it all boils down to: It should be easy for individual investors to know what an ESG-labeled fund’s strategy really is. All funds are required by law to explain to you how they invest and why they performed as they did. When you look at these explanations, the deceptive, inauthentic options stand out.

The Secret Sauce Shouldn’t Be Secret

Traditionally, fund providers have hidden behind the idea of their investing methodology being “proprietary.” They worry if they show you how they invest, their competitors will copy them, and then the party’s over. In other words, you aren’t allowed to see their “secret sauce.” That’s fine when the proof point of your investment is represented with a number showing your returns.

With sustainability, there isn’t a single measure of performance. Companies don’t earn seven out of ten green stars for meeting ESG standards (though they may claim to). You’re investing in the fund provider’s method and the values that drive that methodology.

By asking these two simple questions––Do they say what they do, and do they do what they say?––you can find out how real those values and those methods are. You can feel great about your investments if you have the confidence to look under the hood and ask the tough questions. That’s where we come in.

Till cultivates sustainable investors by creating opportunities to put their power and money where their values are. Launched in 2021, we were founded to engage in conversations that tap into individuals’ enthusiasm for sustainable, empowered investing and help them invest in ways that drive positive, principled change. Ready to put your money where your values are? Then, let’s talk!