The world of ESG is dynamic! Every week is filled with announcements, financings, executive appointments, and regulatory developments. Even for those of us focused on it, it’s hard to make sense of this fast-paced business transformation.
I had planned to focus this week’s newsletter on Materiality – what it is and why it’s important in ESG. But, given the breaking news on Deutsche Bank/DWS offices being raided by police on greenwashing claims, I decided it made more sense to ‘talk’ greenwashing. And, with Elon Musk actively tweeting his strong feelings of disgust toward ESG investing, I expect the topic to remain at the forefront of ESG news for a while.
What is Greenwashing?
Coined in 1986 by environmentalist Jay Westervelt, the term “greenwashing” refers to false or misleading representations by a company about its or its products’ environmental friendliness. In the case of ESG investing, demand has grown significantly over the last several years as investors look for sustainable and ethical investment opportunities. However, this has generated greenwashing whereby investment products are misrepresented as being more sustainable than they really are.
Unfortunately, many companies and organizations have been accused of greenwashing – too many, in fact, to count or cite here in a short newsletter! Thanks to technology and whistleblowers, it is getting harder for businesses to get away with it.
Breaking News in ESG Investing & Greenwashing
Very recently, the U.S. Securities and Exchange Commission (SEC) targeted greenwashing with new ESG fund disclosure rules that expand the scope of greenwashing scrutiny to enhance investor protection. The SEC rules will identify investment products with various levels of ESG centrality to their strategies, requiring different disclosures for each.
Disclosures would be:
· Based on the type of ESG strategies pursued by the funds.
· Most environmentally focused funds would be required to report on greenhouse gas emissions and the carbon intensity of their portfolios.
· Funds that use proxy voting or engagement as part of their ESG strategies would need to provide additional information regarding their activities in these areas.
The SEC will require ESG-focused funds to present information in a standardized, tabular format. This would help investors quickly compare and identify the types of ESG strategies being used. Another proposed update is the “Names rule” to ensure a fund’s name accurately describes the types of investments targeted by the fund without misleading the fund’s investments and risks. To use ESG in a fund’s name, at least 80% of the fund’s assets would need to be invested in assets aligned with an ESG investment policy.
The SEC’s latest move to address greenwashing concerns in ESG investing is just one example of regulatory movement in this space. It’s important to note that EU financial regulators and European countries also have been fast-forward with their own announcements to implement rules to increase scrutiny on ESG & Sustainability investing claims and better safeguard investors. And the Deutsche Bank, DWS office raid this week is a good example of putting real action behind regulatory words.
What do I think?
I’m very supportive of the SEC’s recent ESG fund disclosures rules and the global work being done to enhance metrics and protect investors. Greenwashing is commonly at the center of questions I get when I’m publicly speaking or working with clients. I understand why some people are skeptical of ESG investing and, like Musk, believe it is a scam.
What happened at Deutsche Bank/DWS this week is sadly an important, but necessary, development in the ESG maturation process. I hope it forces change and greater consensus around metrics and measurements so that the ESG movement will progress toward wider adoption.
If you’re interested in learning more about Greenwashing, please reach out. I’d love to share the Greenwashing section of my ESG/S advisory curriculum. You can reach me at: email@example.com.
Sending all my best, always!
Faust Global Partners
Founder & Managing Partner