Helping ESG investors avoid greenwashing

Parametric ESG expert Gwen Le Berre explains how advisers can protect clients from companies that exaggerate — or even lie about — their environmental, social and governance efforts.

As they vote with their wallets, an increasing number of investors have come to appreciate companies that prioritize optimal environmental, social and governance (ESG) factors or outcomes. The growing popularity of ESG investing, however, has sparked a phenomenon known as “greenwashing.”

In an interview with InvestmentNews Create, Gwen Le Berre, Director of Responsible Investing at Parametric, explained the forms greenwashing takes, what it means for investors, and how investors and their advisors can make more informed ESG choices. Edited excerpts of the discussion follow:

InvestmentNews Create: Gwen, please explain the differences in greenwashing, why it’s a problem and how big a problem it really is.

Gwen Le Berre: Coined in the 1980s, greenwashing has plagued ESG investors from the start. In the most extreme cases, it happens when a company tells outright lies about its environmental impact or the social benefit of its products or services. A blatant example would be a company in the energy extraction business, for instance, that claims to be cleaner and less environmentally damaging than it actually is.

There’s also the less malicious side of greenwashing, which comes from overzealous marketing departments that take some kernel of truth and spin it so that the company gives the impression it’s cleaner, greener or perhaps fairer in its employment practices than it actually is. In many ways, greenwashing thrives because of the bigger problem in ESG investing, which is a lack of definitions and of standardization, particularly in the area of disclosure. Since companies have such wide latitude in what they disclose, and because investing is so nuanced and so subject to differences in viewpoints, it’s easy for opinion to get confused with facts.

InvestmentNews Create: Explain the fact vs. opinion issue a bit more.

Gwen Le Berre: A dividend yield is an example of fact important to investors. It’s easily calculated, and anyone can check it. An opinion would be something that combines interpretation, like analysts offering views on a dividend cut. ESG ratings are meant to help investors digest a mountain of information, but they are not facts, they are opinions. They’re designed to provide an easy, one-stop score of a company’s ESG profile, and their numerical nature tends to imply fact rather than opinion. But it’s been documented repeatedly that ESG ratings differ greatly by vendor, because each has its own set of definitions and criteria, and approach things from their own perspective. They prioritize various ESG elements differently. In short, since ratings are opinions, not facts, investors can’t really use them the same way they can use facts.

InvestmentNews Create: Are you saying that if a company purports to be green and receives high ratings for its environmental efforts, that may not actually be the case?

Gwen Le Berre: It depends.Take fast-fashion companies. Some may highlight their use of recycled cotton or polyester fabric made from recycled plastic bottles. While that’s true, they may omit disclosing their use of forced labor in less-developed countries or their share of the high greenhouse gas emissions from transportation as a result of their encouragement of overconsumption. What the investor is led to see, therefore, may not always be the full picture.

InvestmentNews Create: What’s the answer?

Gwen Le Berre: In large part, it involves changing one’s perspective on ESG investing and starting with a focus on what’s important to each investor. With the help of their advisor, an investor must first clarify their own point of view. For some, diversity and inclusion, may be more important issues than resource conservation, to cite a hypothetical. Other investors may be more interested in corporate governance, which actually is the key to making sure that the other ESG issues are managed correctly.

Investors then can look for companies or fund managers whose priorities align with theirs. Advisors are invaluable in this process because they know the ESG approaches of asset managers and can help find those that best meet a client’s preferences.

InvestmentNews Create: How does Parametric approach ESG investing on behalf of investors?

Gwen Le Berre: Because we create separately managed accounts to meet the specific needs and preferences of each client, rules-based investing applies to everything we do at Parametric. As a result, we’re focused less on companies meeting general Parametric investment preferences and more about what individual clients want. That said, as a large institutional investor we are active in encouraging more standardization in corporate reporting and greater disclosure in general. We do that through shareholder engagement, proxy voting and pressing for standardized ESG disclosure. In the area of diversity and inclusion, for example, we have been pressing companies to disclose the comprehensive and granular workforce diversity data that the Equal Employment Opportunity Commission has required companies to collect for many years, but which most have not released.

InvestmentNews Create: Will greenwashing be with us for as long as ESG investing remains popular?

Gwen Le Berre: I think it will continue to some degree because the rewards can be great for a company trying to look better than it actually is. Consumers and investors have become more aware of ESG and more interested in investing in companies based on a positive ESG profile. They’re also more interested in buying green products and services. So the incentives for putting a positive spin on things isn’t going away.

At the same time, there is also reason for investors to be optimistic. Today’s social media world makes it much easier for companies to be called out on misbehavior. Unlike the past, a company’s reputation now can be ruined in a matter of hours, with little it can do to offset the damage. That’s not always fair, of course, but the potential for public shaming, which can exact tremendous real costs in terms of lost sales, fines and stock market value, puts great pressure on companies not to exaggerate as much as they might and to avoid outright falsehoods.

What’s more, regulators here in the US and particularly in Europe are very concerned about greenwashing and are scrutinizing companies much more carefully. There is good reason to believe that greenwashing will become less of a problem in the future.