How to Avoid Greenwashing when Investing in Sustainable Funds

With the rise of green and environmental practices, many investors have directed their focus towards sustainable or ESG investments (environmental, social and governance). This refers to specific investments which look to generate long-term financial returns with a specific focus on sustainable outcomes. Nevertheless, with the rise of sustainable investments, came a considerable rise in financial greenwashing. Greenwashing is the communication strategy of putting forward environmental arguments to form a misleading ecologically responsible image among the public. Being able to identify greenwashing will afford you more comfort when investing and help you make a positive difference in the world.

What forms does greenwashing take in the investment sector?

There are two main forms that greenwashing tends to take. In one, fund management teams claim to be conducting special ESG-specific analysis of prospective investee companies, while in reality doing very little to regulate and inhibit those companies’ practices. The second form is where fund management teams invest in companies which claim misleadingly to be sustainable.

If caught these companies could face regulatory punishment and a severe dent in their reputation, something which can pose a huge risk to investors.

Tips for avoiding greenwashing

1. Do your research

Often, it is possible to identify greenwashing by researching the fund management firms directly. ESG funds have a responsibility to engage with the firms they invest in. A fund with strong sustainability credentials will be able to provide many examples of their work with sustainable companies show a level of transparency. As such, funds which don’t show evidence of their engagement should generally be avoided.

Another method would be assessing whether the image of the fund management firm correlates to the messaging of its sustainability team, making sure to iron out any hypocrisy on a company level. For example, if the fund actively engages with companies looking to promote environmental practices, then the fund itself should be taking measures to be sustainable itself in day-to-day life.

2. Educate yourself

With any venture in life, it is important to make sure you are run up on the terminology and the processes at hand. The same applies to sustainable investment. In making sure you understand the concepts critical to ESG, you will find yourself better equipped in the sustainable world and more able to apply that knowledge to specific ventures and investments. It will also give you a more meticulous eye when researching ESG funds, alleviating stress while investing.

3. Access financial advice

While the popularity of ESG funds seems to be a recent trend, they have been around for a long time. As such, many financial advisors will have considerable experience and special qualifications in the field. They will be knowledgeable on the subject and be able to guide you into the right direction.

Conclusion

Sustainable investment is an impactful way to make a significant change throughout the world. Nevertheless, this can be overshadowed by ‘greenwashing’, throwing doubt on the credibility of complicit investment funds, and encumbering your ESG investment journey. Informing and educating yourself will go a long way to helping you navigate investing in the sustainable world.