Greenwashing can be considered as a marketing spin/tactic to the public who are deceptively persuaded to believe that a particular organization’s products and services are environmentally friendly.
In relation to investments, ‘Greenwashing’ is the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable, or ethical.
Greenwashing thrives on the ability to distort relevant information that a current or prospective investor might require to make informed investment decisions. Given the prevalence of the Digital age, it is only easier to suffer from information overload and succumb to information asymmetry.
It can erode investor confidence in the market for sustainability-related products and threatens the operation of a fair and efficient financial system.
An example of greenwashing is seen when an organization spends significantly more resources on advertising being “green” as opposed to practicing environmentally sound procedures.
Greenwashing can range from changing the name or label of a product to evoke the natural environment to multimillion-dollar campaigns that portray highly polluting energy companies as eco-friendly. Greenwashing serves as a corporate veil to cover unsustainable corporate agendas and policies.
Greenwashing has increased in recent years to persuade consumer demand which is currently residing in environmentally friendly goods and services. New regulations, laws, and guidelines by organizations such as the ASIC are meant to discourage companies from using greenwashing to deceive consumers.
ASIC – Efforts to reduce Greenwashing:
To help improve the quality of disclosure, ASIC recognizes the recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and encourages voluntary disclosure that is in accordance with the TCFD framework. If a company reports climate-related information under the TCFD framework, ASIC expects that the company will be well placed to transition to any future standard.
ASIC – First Penalty for Greenwashing:
The ASIC has initiated its first crackdown for greenwashing, fining Australian company Tlou Energy $53,280. Tlou is a corporate which is developing power projects in parts of Africa. The company has paid the total for four infringements for making alleged false or misleading sustainability-related statements to the ASX in October 2022.
How to protect yourself from being Greenwashed:
Investors in general are suggested by following steps to protect the investors:
- Overused industry language – “Eco-friendly” or “all natural” – claimed by thousands of companies.
- Misleading graphic – Mountains, trees and streams on plastic bottles portray environmental compassion.
- Award claims – A brand states it’s the best environmental product in the industry without proof.
- Seals and labels – Text featuring “award-winning product” on a simulated environmental symbol.
- Scientific terms and buzzwords – 100% biodegradable or 100% compostable product claims.
With these steps in mind, experienced financial professionals would also serve as a safeguard against Greenwashing. A consultation with them can help improve your chances of making the best ESG investment.
Source: Investopedia and ASIC
