Greenwashing Concerns Rise as ESG Investment Skyrockets

This blog was coauthored by Elizabeth Sisul.

Interest in environmental, social, and corporate governance (ESG) investment continues to surge as more investors look to put their money into products that profess to promote ESG values. One change, however, has been a move toward fixed-income funds as compared to equity products. As more ESG bond funds enter the market, the risk of greenwashing—the practice of providing misleading information regarding the sustainability credentials of their products—is likely to play an even greater role.

ESG Bond Fund Sales Surge

The sale of ESG bond funds rose to $54 billion from January to May 2021. In 2020, the total sale of these funds was $64 billion, which was itself a 12% increase over the previous year. In the US, 2021 total sales were at $4.75 billion at the end of May, compared to $5.92 billion in 2020. As this trend continues and more ESG bond funds enter the market, there will almost certainly be increased attention on the potential for greenwashing. The threat of greenwashing is heightened by the lack of reliable, comparable ESG data and standards. 

Regulators’ Efforts to Combat Greenwashing

Regulators around the world have identified greenwashing as a risk. In June, the International Organization of Securities Commissions, which is composed of securities regulators from the Americas, Europe, and Asia, issued a report in which it proposed recommendations for increased scrutiny on greenwashing by asset managers. In Europe, the Sustainable Finance Disclosure Regulation, which began to go into effect in March of 2021, requires firms to disclose the sustainability impacts of their investment decisions in an effort to combat greenwashing. Although the US has lagged Europe in its focus on ESG and sustainability regulations, in March 2021, the US Securities and Exchange Commission’s (SEC’s) Division of Examinations issued a risk alert that detailed observations from recent exams of investment advisors, registered investment companies, and private funds offering ESG products and services. The alert signals that the SEC is prioritizing review of misleading ESG practices.

As momentum behind ESG soars, it is likely that the supply of ESG bond funds will continue to increase, an exciting trend for both investors and society, as these bonds will hopefully drive innovation that will lead to a more sustainable future. However, investors and firms must be diligent as standards for ESG investment practices evolve to address the heightened risk of greenwashing in ESG products and services. Guidehouse’s experience working within and for financial institutions assisting with developing appropriate disclosures makes us well suited to help clients consider greenwashing risk in a rapidly evolving space.