So you want to be a climate-conscious investor. Here’s how to avoid greenwashing
During a recent rally outside the University of Toronto, Saarthak Singh and Achint Singh joined the crowd calling on the government to take action on climate change. But it’s not the only way they are committed to a greener future. Both students also plan financial investments that will benefit the environment.
“Climate fear is at an all-time high,” Saarthak Singh said. “How can I make sure I’m also having a positive impact on the world?
Many Canadians also let their money do the talking. Sustainable fund assets reached nearly $38 billion in Canada last year. But finding the right investments can be a challenge: while a growing number of companies and funds are posting climate-friendly credentials, many are failing to deliver on their promises.
More transparency needed
Achint Singh decided to take matters into his own hands and founded a Sustainable Investing Club on campus. They dig through pages of documents to make their decisions about what to support.
“The information is not readily available. It is opaque,” he said. “It’s not something ordinary people can just look up… There needs to be more transparency and more clarity.”
Making it easier for people to invest sustainably will have an impact, he added.
“It’s going to grow into a bigger movement… Businesses need to start paying attention to that.”
A number of companies and funds are now receiving environmental, social and governance (ESG) ratings. They are produced by various commercial and non-profit organizations including MSCI, Morningstar and the Global Reporting Initiative.
But Saarthak Singh believes many of them are not strict enough, noting that some oil companies are relatively well valued. He would like the ESG baskets to be separated so that companies and funds can be judged solely on environmental activities.
“Let’s not give credit to companies that sell their carbon, shall we?” he said.
Industry watchers are also sounding the alarm about greenwashing, a phrase used to describe companies or funds that advertise themselves as more climate-friendly than they actually are. InfluenceMap is a climate change think tank that has researched more than 700 funds marketed with ESG and climate-related keywords in 2021. She found that 71 percent had companies in their portfolios that did not align with global climate targets.
Daan Van Acker, who authored the report, says that while there has been a crackdown on greenwashing, further action is needed by state regulators on language and labels.
“Right now there is very little consistency or standardization of what it means or doesn’t mean to be green,” he said.
The federal government has proposed some guidelines for green investments that define which investments can use the green label. But they make room for some polluting activities and recommend that oil sands activities can be labeled “transitional.”
Environmental groups have criticized the labels, saying there is little point in labeling oil and gas as sustainable at any level.
Look under the hood
“It’s a bit like the Wild West when it comes to marketing green investing,” said Tim Nash, president of Good Investing, which provides research and coaching for green investors.
“It’s really important for Canadian investors to look behind the scenes of their investments to really understand what’s inside the fund they’re looking to buy.”
Nash points to a fund like the Franklin Clearbridge Sustainable Global Infrastructure Income Active ETF. He says an investor might assume it’s a climate-friendly fund but would be “quite shocked” to learn Enbridge is included.
“At the end of the day, they’re a pipeline company,” he said. “If we could get the entire industry to use the same terms and expressions, I think it would make a big difference.”
For now, experts have some simple advice for investors to avoid greenwashing:
- Find out which companies are listed in green funds.
- Look beyond keywords like “sustainable” for specific phrases like “fossil-fuel-free.”
- Use screening tools like Morningstar, which rank these funds based on how environmentally friendly they are.