Advisers urged to beware of greenwashing traps in ESG investments

As greenwashing becomes more prevalent, financial advisers are being urged to do their due diligence when researching companies and their ESG practices.

According to Adviser Ratings, both clients and advisers are increasingly wanting to integrate more ESG into their portfolios.

In fact, as revealed by its latest survey, over 50 per cent of advisers questioned by Adviser Ratings said they planned to lift their ESG allocation.

However, with the growing demand for sustainable investments, some companies are taking advantage of this trend by engaging in greenwashing — a practice in which they make false or misleading claims about the environmental benefits of their products or services.

As such, advisers are being encouraged to do their due diligence when researching companies and their ESG practices.

The following are some tips that can help advisers avoid greenwashing when offering or promoting sustainability-related products.

1. Do your research: Before promoting or offering sustainability-related products, conduct thorough research on the companies and funds to ensure that they have a strong commitment to sustainability. Look for evidence of sustainable practices, such as eco-friendly production processes, reduced carbon emissions, and commitment to social justice.
2. Check for ESG ratings: ESG ratings and rankings can be a useful tool in assessing the sustainability credentials of companies and funds. Look for ratings from reputable organisations and compare ratings across different companies and funds to ensure that you are making informed decisions.
3. Avoid “green” buzzwords: Be wary of companies or funds that use buzzwords such as “green”, “eco-friendly”, or “sustainable” without providing any concrete evidence to support these claims. Ask for specific information on their sustainability practices and make sure that they align with your clients’ values.
4. Monitor investments: Once you have invested in a company or fund, make sure to regularly monitor their sustainability credentials and practices. Keep abreast of any changes or developments that may impact their sustainability commitments.

Last year, after the Australian Securities and Investments Commission (ASIC) released an information sheet to help issuers avoid greenwashing when offering or promoting sustainability-related products, Ethical Invest Group called for “relevant and accurate training” for advisers as the risk of providing advice that inadvertently supports companies or investment funds complicit in greenwashing falls “unfortunately and unfairly” on professional planners.

“To ensure your client is not exposed to a harmful industry, one they’ve specifically asked to avoid, your due diligence is required. And your skills and knowledge to avoid greenwashing will come into play,” Ethical Invest Group founder Alexandra Brown said at the time.

“Greenwashing can occur all along the investment process. From how a company discloses their sustainability efforts, and what level of corporate governance they have in place, to how this information is used by ratings providers and investment managers.

“Does a company understand what ESG metrics to disclose, and how to measure them? With limited rules in place for disclosure, comparing companies is difficult, and greenwashing can occur either deliberately or unintentionally.”