Greenwashing is on the rise - here's how to spot it

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Plenty of investments claim to be kind to people and the planet - but how much of this is marketing spin? Three strategies can help investors wring out the greenwash.

Australians increasingly want to put their money into investments that are environmentally friendly, sustainable and ethical.

The catch is that our passion for matching portfolios with personal values has fuelled the rise of greenwashing - the practice of making an investment sounds more eco-friendly than it really is.

how to spot greenwashing

Simon O'Connor, CEO of the Responsible Investment Association Australasia (RIAA) says greenwashing is an increasing problem, particularly as more investment funds respond to surging investor demand.

That said, he notes, "Most investment managers don't wake up in the morning looking to intentionally mislead consumers or investors. It's the disjunct between what it says on the packet and what investors expect to see in the portfolio that needs to be fixed."

No clear guidelines

While companies - including investment managers, can face hefty fines for making false or misleading claims about products, there are currently no mandatory reporting standards in Australia to help consumers better understand and compare 'green' products.

As O'Connor points out, "This is an evolving space. There are emerging reporting standards that over time will improve the consistency around how we label products, making it harder to greenwash."

In the meantime, investors can find the devil lies in the detail. O'Connor says some funds will allow a small amount of exposure to fossil fuels, meaning they might include companies that derive only 5% or 10% of their revenue from fossil fuels.

"Most products will be up front about this," he notes. "It's only greenwashing if they claim to be 'fossil fuel free' or use some other sweeping statement while still having this exposure."

A further challenge is that investors each have their own views around what matters in a sustainable investment. O'Connor notes some may believe it's important to avoid sectors such as alcohol, which won't be a problem for others.

Once you've decided what you'd like to see in a green investment, three strategies can help you sort the spin from the facts.

1. Look past the name

Don't base an investment decision solely on a fund's name. Dig deeper to see what sort of claims the fund is making - and how these claims are being achieved.

It's an area where consumers need to stay alert to the fine print.

As O'Connor points out, a fund that claims to be 'low carbon versus the benchmark' may not necessarily exclude thermal coal mining from its portfolio. It just means the fund's portfolio will have a lower carbon footprint than the benchmark it's tracking.

2. Dig deep into the underlying companies

It's also worth taking a close look at the companies a fund invests in.

"This is to check that the product is aligned with the specific issues that you personally deem important," says O'Connor.

This type of deep dive can dish up surprises.

"If you're looking to invest in a fund that's labelled as a 'clean energy fund' you would expect to see renewable energy companies. You also might expect not to see any big polluters," O'Conner explains. "Keep in mind though, there are different approaches to managing issues such as fossil fuels in investment portfolios, and the most impactful way may not always be to divest."

In fact, there is a reasonable argument for funds to have a stake in companies that produce fossil fuels or other eco-harmful products, as the fund manager can use its influence to push for positive change.

3. Check for credible certification

A simple way to avoid greenwashing altogether is by looking for third party certification such as RIAA's Responsible Investment Certification Program.

O'Connor says, "RIAA does the heavy lifting that helps consumers and investors understand how products are made and managed in terms of environmental and social sustainability. We kick the tyres to make sure what they say is what they do.

The RIAA also has a handy Responsible Returns online tool that can help consumers make responsible choices.  It features over 200 banking, super and investment products that have all been certified by the RIAA.

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A former Chartered Accountant, Nicola Field has been a regular contributor to Money for 20 years, and writes on personal finance issues for some of Australia's largest financial institutions. She is the author of Investing in Your Child's Future and Baby or Bust, and has collaborated with Paul Clitheroe on a variety of projects including radio scripts, newspaper columns, and several books.

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