Greenwashing: What to look for when it comes to sustainable investing

Sustainable investing has had a rough ride in recent years. While many individuals want to make a difference to the environment and society through their investments, the risk of “greenwashing” of sustainable investments has posed a major concern. Indeed, it has been difficult for many investors to know and identify what a sustainable investment really is.

What is greenwashing?

Greenwashing is the act of making false or potentially misleading statements about the sustainability or environmental credentials of a product. In the context of funds, this can manifest itself in a multitude of ways and distract from and delay credible action.

“We often see inappropriate use of data,” explains Stephen Metcalf, head of Sustainable Investing at RBC Wealth Management in the British Isles and Asia. “Claims, for instance, that a fund has taken ‘x’ number of cars off the road. Whereas in reality the companies in that fund have just reduced their carbon emissions, and the fund then uses a loosely worded impact metaphor to market itself.”

Likewise, excessive use of buzzwords is typically a red flag, as is the use of imagery such as trees that have no substantial or meaningful link to the investment or fund in question.

“There are funds that claim they use ESG integration and pass that off as a sustainability objective,” explains Tom Blathwayt, director of ESG at RBC Europe. “In truth, however, ESG integration should probably be a bare minimum on top of which you can build a sustainability objective.”

The need for clarity is clear, with concerns about greenwashing very much at the forefront of investors’ minds. The Association of Investment Companies’ ESG Attitudes Tracker noted that 63 percent of those surveyed in 2023 agreed with the statement “I’m not convinced by ESG statements from funds.”

So, what is deemed a sustainable investment and how can investors trust the claims that are made?

Introducing the Sustainability Disclosure Requirements

Sustainable investing is defined as investing with the stated intention of achieving positive sustainability outcomes (i.e. with a sustainability objective). And the Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR) regime, implemented in 2024, is helping consumers navigate the market for sustainable investment products.

Its first phase introduced the anti-greenwashing rule for all FCA-authorised firms. The rule states that firms need to ensure their sustainability references are fair, clear and not misleading, and are proportionate to the sustainability profile of the product and services.

“With the new rule, firms can’t just highlight positive sustainability impacts,” says Blathwayt. “If a statement refers to a small component of a fund or a small part of a business, this has to be clarified. Claims have to be clear and balanced. That is one of the big changes going forward.”

From 31 July 2024, the second phase of SDR applies, with the introduction of the fund labelling regime. These labels are intended to help investors understand the sustainability objectives of any given fund, and they fall into four categories*:

• Sustainability Focus: invests mainly in assets that focus on sustainability for people or the planet
• Sustainability Improvers: invests mainly in assets that may not be sustainable now but are aiming to improve their sustainability
• Sustainability Impact: invests mainly in solutions to sustainability problems, with the goal of achieving a positive impact for people or the planet
• Sustainability Mixed Goals: invests mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time or aim to achieve a positive impact for people or the planet

*Each labelled product may invest in other assets for liquidity and risk management purposes, so long as 70 percent of the gross value of the product’s assets are invested in line with the sustainability objective.

Funds with these labels will need to provide investors with clear and simple information, including what the sustainability goal is, the approach to achieving it and annual updates on progress towards the goal.

“I know the FCA did a lot of work with investors, and I think these labels certainly align well with investor expectations,” says Metcalf. “I think it really makes a clear distinction between something which inadvertently may have sustainability characteristics versus something where there is a clear sustainability objective to invest.”

The third important SDR date is 2 Dec. 2024, which is the date by which firms must make necessary changes to meet naming and marketing requirements.

Only funds with the aforementioned labels can use “sustainable,” “sustainability” and “impact” in their names – with the latter usable only by funds with the “Sustainability Impact” label, subject to strict criteria and disclosure standards.

Non-labelled products that use ESG-related terms in their name or marketing must follow the same disclosure standards as funds with a label, as well as provide a statement to clarify why the product doesn’t have a label.

“There are still some questions about how SDR will play out in practice,” says Blathwayt. “But it’s such a big step forward, because now we have standardised categories of sustainability outcomes and clarity on how funds can meet these outcomes. These are crucial to help us meet the needs of our clients.”

What does this mean for investors?

On the surface, the introduction of the SDR should provide clarity that has been missing around sustainable investing, and investors may see the names of some of their funds change in the coming year. RBC’s Responsible and Sustainability Investment Framework is consistent with the anti-greenwashing rule and aligned with the SDR labelling regime.

At the heart of RBC Wealth Management’s framework, and investment approach, is a distinction between a “core” responsible investment approach, which applies to all direct equities and funds covered by the firm’s central research team, and an “additional” sustainability investment approach for investors with exposure to funds and products with a sustainability objective. RBC’s process for assessing sustainability preferences will evolve to align with this.

“The core approach is what all discretionary investors receive as a minimum, with the goal to meet a client’s investment objective, namely, maximise investment returns for a given level of risk,” says Metcalf.

RBC Wealth Management employs an ESG-integration approach in investment decision-making. Depending on a client’s preferences and their profile, RBC Wealth Management can also exclude specific sectors, screen funds or companies based on ESG factors, and use thematic investments. The core responsible investment products may have sustainability characteristics but not sustainability objectives. For example, an investor may feel strongly about not investing in a company associated with animal testing, but doesn’t have a need for a broader sustainability objective.

“Additional” investments are for clients with extra sustainability-related preferences or requirements, such as wanting to drive positive environmental change. These investments will have a sustainability objective, as per the SDR regulations. These products are labelled under the regime and must meet specific criteria.

How to educate yourself to make the best decisions on greenwashing

The confusion around greenwashing has created a measure of uncertainty among investors. Indeed, in a RBC Wealth Management survey of UK clients, 45 percent of respondents stated they still require further education in the sustainability space.

“There is going to be more transparency, so investors will be able to get under the skin of funds and get a better sense of their sustainability objectives,” says Blathwayt. “And I would certainly recommend that. Be curious and ask questions, especially if something isn’t clear.”

“Look out for overhyped language or dubious claims in marketing material,” says Metcalf. “Check if a fund is using a label and find out what its goals are and how it intends to achieve them. And if in doubt, speak to your trusted advisor who will be able to conduct their own due diligence.”

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