How Asset Owners and Asset Managers Can Help Companies Avoid Greenwashing

By Shounak Bagchi is the ESG Engagement Manager for Cartica Management.

The volume of capital flowing[i] into companies and funds that tout their sustainability credentials has risen sharply. At the same time, investors, consumers, and regulators have begun to question whether companies are as “green” as they claim. Accusations of greenwashing can hinder investor confidence, weaken consumer demands, and invite potential regulatory scrutiny. There are many ways asset owners and asset managers can help public companies avoid this fate.

What is greenwashing?

Greenwashing is the practice of stating sustainability milestones or goals that are exaggerated, misleading, or not true. This often occurs when there are sizeable gaps between a company’s marketing and its practices. The most common type of greenwashing[ii] is placing a “green,” sustainable, or eco-friendly label on a product that does not deserve the designation.

Companies accused of greenwashing often present unaudited information, vague targets, or unproven environmental claims. They announce public sustainability goals without any hard commitments. They may make selective disclosures that hide negative carbon emissions data while highlighting a narrow set of positive sustainable attributes.

Greenwashers are also accused of focusing their energy on areas that are not particularly impactful:  e.g., a hotel chain may discontinue daily towel replacement service but does not use available renewable energy sources. Companies that make symbolic gestures that don’t address the impact of their operations, such as a donation toward an environmental cause, may also be accused of greenwashing.  

Consumers, climate watchdog groups[iii], and NGOs have become vigilant[iv] about criticizing businesses that engage in this practice. Investors are also alarmed by rising greenwashing. In a Schroders Institutional Study[v], roughly 60 percent of investors cited greenwashing as their top concern when integrating ESG into investment decisions. Efforts are also underway by regulators in the EU[vi], Japan[vii], Taiwan[viii], and the United States[ix] to set out rules to discourage the practice of greenwashing. 

10 ways investors can help companies avoid greenwashing

1. Set internal policy on sustainability – High standards start at the top. Investors should have their own ESG or Sustainability policies along with having dedicated sustainability staff and resources. This sends a clear signal that greenwashing will be taken seriously.
2. Push for comprehensive goals – Companies often make green pledges without a specific action plan. Ask for companies to disclose their existing climate impacts, their specific and time-bound goals for improvement as well as their practices and policies in place to reach their objectives.   
3. See if sustainability goals are aligned with business goals – Companies should focus sustainability efforts where there is most likely to be impact on business value. Sustainability KPIs should be aligned with business KPIs.
4. Focus on substance before style – Look beyond colorful sustainability reports. Request that companies present the substance of their climate impacts clearly, with a focus on key risks, opportunities, and improvement in managing material issues over time.
5. Inquire about sustainability leadership – Investors should ask their companies who is ultimately responsible for verifying sustainability claims. This could be a Board committee, the CEO, CFO, head of IR, or a subject-matter expert.
6. Ensure sustainability reporting frameworks are used – Companies should align ESG and Sustainability reporting with the TCFD, GRI, or any industry-specific framework (i.e., GRESB for real estate). These frameworks provide the industry-specific factors a company should address, and they allow investors to compare companies to their peers using standardized metrics.
7. Ensure achievable targets are set – Companies often set unattainable goals. Investors should welcome bold action on sustainability, but also be realistic that the company has the resources needed to achieve them.
8. Encourage companies to pursue green certifications – There are several industry-specific organizations that verify sustainable credentials, such as the SBTi. Going through the process of certification validates environmental claims and can make stakeholders comfortable with a company’s sustainability strategy.
9. Be realistic about expectations –Comprehensive sustainability reporting is a laborious process, and no company is perfect. Investors should understand that each company’s sustainability goals are a work in progress. Allowing room for growth minimizes the risk of a company overstating their green commitments.
10. Seek to help, not penalize – Sustainability reporting can be very technical and specialized. Most companies are at the early stages of thinking about this issue, and many are open to investor feedback. It is important that investors communicate their expectations, share best practices, and acknowledge incremental improvements to encourage companies to formulate the best sustainability framework possible.

All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.

About the Author:

Shounak Bagchi is the ESG Engagement Manager for Cartica Management and a freelance writer. He has spent the past seven years working with institutional investors to integrate ESG factors into their decision-making process.