What is Greenwashing and why is it so bad?

‘Greenwashing’ is perhaps a term that not everyone is aware of. But unfortunately, it is becoming more and more prevalent in today’s financial world.

With the increased demand for environmentally friendly products, investing in ESG (environmental, social and governance) friendly companies is also growing. At the same time, financial institutions are seeking to bring their portfolios in line with global climate targets.

As a result, ESG investing has become an increasingly popular option for socially conscious investors.

For these kinds of investors, it is vital that any companies or business they put their money into includes certain ESG criteria, such as promoting sustainable practices, supporting climate change measures, corporate social responsibility practices, philanthropy, employees’ working conditions, human rights, diversity and equality, inclusion, ethical business policies and board diversity, among others.

Greenwashing occurs when a company or business professes to offer certain ecological and environmentally sound products or certain working conditions. However, if you were to delve a little deeper into the workings of that company or business, you would discover that the environmental benefit they claim to offer is not what it seems.

For example, imagine you are an investor for whom good employee working conditions and human rights are important. You would certainly not be happy to find out that you have invested in a company that uses child labour.

Greenwashing exploits the fact that many investors – especially the younger generation – are actively looking to invest in companies that conform to their ESG beliefs and standards. This has led to some so-called eco friendly companies to make false claims – or at the least giving a misleading impression – that they are more environmentally friendly than they are, for instance.

The Deutsche Bank debacle

The offices of Deutsche Bank in Frankfurt, Germany, as well as its asset management subsidiary DWS, were recently raided by prosecutors as part of an investigation. They allegedly were promoting investment products as being ‘greener’ and more environmentally friendly than they actually were.

This, the prosecutors stated, amounted to “suspicion of investment fraud.” They said that they had found enough indications that, contrary to what they were asserting in their sales prospectus, DWS had applied ESG standards only in a minority of investments.

In a statement, Deutsche Bank said that it would “work together with all relevant regulators and authorities.”

Commenting on the Deutsche Bank raid, deVere Group CEO and founder Nigel Green said that it emphasises the need for global regulators to work together to stamp greenwashing out.

In the meantime, the U.S. SEC (Securities and Exchange Commission) recently put forward proposals to tighten disclosure requirements on the rising number of ESG investments.

How can you avoid Greenwashing?

The best ESG companies or businesses for sustainable investing, are financially strong, committed to making the world a better place, have a positive environmental impact, and generate healthy returns for investors.

Here are some tips which can help you avoid companies and business that attempt to employ greenwashing:

  • Check out how the company is structured and whether its leaders ‘practise what they preach’.
  • Take a look at the people who make up the board – is it diverse and inclusive? Are there people on the board who have been outspoken ESG advocates or experts in the field?
  • Do your research – a simple Google search will often uncover any scandals and/or untoward dealings.
  • Do not let buzzwords sway you. Base your decisions on concrete actions.
  • Find out if the company is a signatory to any environmentally friendly initiatives. For example, deVere Group is one of the founding signatories of the UN-backed Net Zero initiative.

Nowadays, there are plenty of companies who are genuinely basing their business models on ESG.

Here are five ESG companies you may be interested in investing in.

Environmental, social and governance (ESG) issues are a priority for deVere Group. Get in touch should you like more information about ESG investing.

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