Environment, society, and governance assets have a firm and growing hold in the investment arena. What might have once been a niche market is now a major element of doing business. Projections place cumulative ESG assets under management at $53 trillion by 2025.

Though the trend for these products continues upward, ESG greenwashing is a real issue that could pose significant financial and reputational harm to companies. It may also lead to substantial losses for investors.

Become Familiar With ESG Greenwashing

The environmental component of ESG funds can’t be overlooked. For U.S. consumers, sustainability is a priority, with 75% indicating that they think it is essential for businesses to engage in eco-friendly practices. Consumer preferences can drive the direction of investments and the success of products. Consumers want to do business with sustainable companies, but most don’t trust what brands say about their environmental practices.

What is greenwashing? Businesses know consumers think sustainability is important and are willing to pay more for products and services from eco-conscious companies. To appeal to this market, they often make false or highly exaggerated claims about sustainability practices and products.

The tactic of misleading consumers about a company’s environmental sustainability is known as “greenwashing.” ESG greenwashing refers to portfolios that contain greenwashed products. These products often hide among those for businesses making genuine efforts to improve their environmental and carbon footprints.

Understand How ESG Investing Works

The fact that ESG is an independent investment strategy demonstrates how vital these three values are to investors and consumers. Furthermore, ESG products tend to outperform traditional market-traded assets, providing financial value along with ethical values to investors. Investors interested in placing their money with companies committed to strong environment, society, and governance measures and values build portfolios that include ESG products, often relying on ESG scores and rankings to determine which products to invest in.

Businesses interested in growing through investor buy-in can’t ignore the ESG trend. Though they may incorporate sustainability in their business models, token gestures aren’t enough and can lead to a perception among investors and consumers that the company is engaging in ESG greenwashing. Conscientious businesses frequently hire ESG consultants specializing in the environmental components of ESG to help them develop viable sustainability solutions to improve their frameworks and performance.

Many companies also turn to independent, third-party ratings organizations to gain a measure of credibility. While some genuinely don’t want to inadvertently mislead investors and consumers, others take advantage of a lack of standardization to obtain a score that makes them look good with as little effort on their part as possible. The inconsistencies and unethical practices may drag down the entire movement, leading to mistrust and disillusionment with a trend that has the potential to move the corporate needle on environment, society, and governance practices.

Investigate Products for ESG Greenwashing

Each rating organization devises its own set of measures and standards for ESG. This lack of industry-wide standardization creates loopholes for unethical businesses. It also leads to confusion for companies looking to make positive changes. Without standards for measuring a company’s ESG performance, scores are inconsistently reliable at best.

The inconsistencies also create a challenge for investors. Additionally, not all environmentally sustainable companies seek an ESG ranking, complicating the decision-making process. For now, those interested in companies making authentic strides in their practices must research each business and product.

Online tools can help investors determine whether an ESG product contains holdings in industries known to engage in ESG greenwashing or to have detrimental impacts on the environment. For instance, many funds labeled as ESG include investments in companies that practice deforestation or have high fossil fuel emissions or natural resource consumption.

Potential Progress Through Legal Measures

The European Union and the U.S. Securities and Exchange Commission could provide much-needed regulatory support. The E.U.’s revised Markets and Financial Initiatives Directive makes asset managers and financial advisors accountable for advising clients seeking environmentally sustainable investment products. Unfortunately, the directive does not create or address standardization in sustainability measures.

In the U.S., the SEC proposes two rules addressing standardization and enforcement. Enacting these rules would boost the reliability of ESG products and require companies to comply with standards, imposing penalties for those that don’t. Though the rules might not guarantee that a business that touts environmental consciousness actually adheres to stringent eco-friendly practices, they are a step in the right direction.

Prevent ESG Greenwashing With ESG Property Consultants

ESG Property Consultants help businesses and investors execute the “E” in ESG. We work with you to develop a framework and strategy to incorporate sustainability into your business practices and real estate investments. With expertise in construction, real estate, and sustainability, our consultants ensure companies don’t get caught in the ESG greenwashing trap. What’s more, we help you save money in the process. Learn more about what we can do for you.