Beware of Greenwashing in Investment Reporting

Just as a dishwashing soap may make claims about its environmental impact, so too can a company make fluffed up claims about its corporate responsibility. The term greenwashing applies to both situations.

With the coverage of the continuing climate crisis increasing, so may be the calls for caution around products that consider themselves environmentally friendly. But employees may want to be just as wary of allegedly green investment funds. Socially responsible investments (“SRI”) are on the rise. But inaccurate statements could be driving the inclusion of some companies into those funds improperly. As you may recall from our update on SRI earlier this year, SRI portfolios aim to improve social conditions while also generating positive, competitive returns for the investors involved. Some of those SRI portfolios use the environment, social and governance factors to compare funds. Since the portfolios began to rise in 2014 as potentially competitive the rate of growth as been notable. The gain just from 2016 to 2018 was more than 13% - a significant rate of growth. In short, being able to squeeze into an SRI classification would be a mighty helpful thing.

Just as a dishwashing soap may make claims about its environmental impact, so too can a company make fluffed up claims about its corporate responsibility. The term greenwashing applies to both situations. According to Investopedia, “Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.

Just as the consumer products watchdogs have asked for clearer labeling standards for consumer products, like that dishwashing soap example, consumer watchdogs and environmental groups are also asking for better labeling for the SRI industry.  In an October 18, 2019, written by law professors by Cynthia A. Williams and Jill E. Fisch and signed by investors with more than $5 trillion in assets under management, those watch dog groups called for the SEC to start a rulemaking process to standardize ESG and to make a rule to add coherence to the issue. While that petition is pending, another petition was filed by an environmental group challenging the issue from a similar dimension. As a brief way of explanation, executive agencies, like the Securities Exchange Commission, can be prompted to alter/amend/or provide additional guidance on their regulations via request for proposed rule making from the public. The October 2018 letter notes:  “Without adequate standards, more and more public companies are voluntarily producing “sustainability reports” designed to explain how they are creating long term value. There are substantial problems with the nature, timing, and extent of these voluntary disclosures, however. Thus, we respectfully ask the Commission to engage in notice and comment rule-making to develop a comprehensive framework for clearer, more consistent, more complete, and more easily comparable information relevant to companies’ long-term risks and performance.” This request falls into the category of rulemaking we discussed in our articles “Where Employees Can Find the Best Financial Information,” and “Beyond the Death of the Fiduciary Rule - What Rules Might be on the Radar for Changes?” There we mentioned that rule 30e-3 creates new website friendly disclosure and reporting information. It also announced an effort to gather information from designers and others in communications about how to better deliver information to the public about publicly traded companies.

Some conservative leaning policy groups, like the Energy and Environment Legal Institute, also petitioned the Commission to ensure that the true costs of environmental stewardship be revealed to investors. Their theory is that these environmental costs deplete assets that belong to shareholders.

Whatever the question, the issue of whether information about ESG is making it to your employees so that they can make proper decisions is an important one. Sponsors may do well to provide education sessions on understanding greenwashing in investment language. Sessions with advisors and other industry experts can be helpful. So too could providing recordings of hearings or other testimony at the SEC on this topic.

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