ESG | Opinion
Different shades of green
Sustainable-led investment strategies are on the rise, but so is greenwashing.
Did you hear about the pharmaceutical company that gave medicine to some of the world’s poorest people for free? Yes, a mul- ti-national drug developer offered doses of a particular treatment to the sick in a devel- oping world country. This was believed to be part of the company’s environmental, social and governance (ESG) policy to improve access to healthcare. Well, it may not be the goodwill gesture that the company wanted the world to believe that it was making. This was a case of while it was giving with one hand; it was keeping its coffers filled with the other. It has been claimed that at the same time that the company was giving doses of a medicine away it was trying to block a generic version of that very treatment from appearing on the shelves in local pharma- cies, which would have cost sufferers much less to buy than its own product. If true, this would be an epic ESG fail. Making a company appear more ESG- friendly than it actually is, or issuing mis-
leading claims about the ESG benefits of a product, is known as greenwashing. It is a dirty word among those using their invest- ment pots to help make the world a better place, but unfortunately it appears to be on the rise as companies work to meet demand from consumers and investors for more sustainable products. Another, more famous example, is German car-maker Volkswagen claiming that its die- sel engines were more environmentally friendly than they proved to be. Such scandals can do more harm than sim- ply eroding a portfolio’s value. It could also see investors fail in their wish to help reduce the impact of climate change or pro- vide access to clean water. So keeping portfolios greenwashed-free is becoming a big concern as more schemes set ESG-led policies and new sustainable funds are being launched it seems almost daily.
This is easier said than done. Getting inde- pendent data to verify a company’s claims
can be difficult, especially when this infor- mation needs to stretch throughout its sup- ply chain. So news that the government and the Euro- pean Union are each working to improve awareness of the environmental and social impact that investments are making is wel- come news. One of the EU’s initiatives to help eradicate greenwashing is to devise a legal definition that would label an invest- ment as “green”. This stamp of quality is still in the development phase but it would be an important addition to an investor’s toolkit, although I cannot at this stage believe that it would be foolproof. The EU has also proposed a law that could force pension schemes and insurers to dis- close the environmental risks in their port- folios and on the social consequences of their investment decisions. This, which fol- lows a similar ruling in the UK, is designed to spot evidence of greenwashing. Having to disclose to their members if any investments could pollute water or damage the climate, for example, could make trus- tees and investment managers go the extra yard to make sure their portfolio is as “green” as they believe it is. Making it their duty to be sure could be the way forward, although it is hard to see what will com- pletely eradicate the problem.
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22 | portfolio institutional | May–June 2019 | issue 84
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