Greenwash Controversy

In this thematic piece, Head of Research David Gorman explores how a lack of agreed terminology and standards around 'green' funds could lead to a potential mis-selling scandal somewhere down the line.

The market for sustainable investment funds has grown rapidly and with it the threat of greenwashing, which is the over-statement or misrepresentation of so-called green credentials by both companies and asset managers in order to enhance a corporate message or attract investment.

As Thoughtful Investors of many years, we are pleased to see the growth in the amount of money being allocated to ‘sustainable’ or ‘ESG’ funds as the world wakes up to the real impact of investing. After many years of being regarded as a niche approach, sustainable investing has become mainstream – even fashionable.

Although the market cooled in the first half of 2022, investors across the world put $142.5 billion into sustainable funds in the fourth quarter of 2021, up 12% on the previous quarter. This took worldwide assets under management which are defined as sustainable up to $2.7 trillion, spread across more than 5,900 funds – of which three quarters are in Europe.(1)

Investors across the world put $142.5 billion into sustainable funds in the fourth quarter of 2021, up 12% on the previous quarter.


Morningstar notes, as we have, the widespread rebranding of conventional funds into sustainable offerings as asset managers respond to the latest market trend and the flow of investor funds.(2)

Anyone spending a couple of hours looking at the media will see that consumer-facing companies are also very keen to present themselves in a ‘green’ light.

However, as an investor and a consumer, it pays to be generally sceptical and alive to greenwashing. This approach usually involves an element of misdirection; oil companies telling us how much they invest in windfarms is a classic example, but fashion brands, banks and online retailers are all prone to this activity and a quick web search brings up lots of examples. The textbook definition of greenwashing is;

"Greenwashing is the over-representation or misrepresentation - either intentionally or unintentionally - of the qualifications and credibility of an investment portfolio that promotes itself as green, sustainable, responsible or ESG." (3)

Of course, companies are legally allowed to drill for oil and gas, it’s that they do this but still give the impression through their advertising that they are really a green energy company, suggesting the possibility that consumers and investors might be deceived.

How is this allowed to happen? A key problem is the lack of agreed terminology and standards as well as the proliferation of ESG ratings agencies, whose output has varying degrees of utility. This creates a lot of scope for interpretation of what is ‘green’. This means that, often, companies self-report to their own standards which feeds through into the information that funds collect and report. This is especially a problem with passive funds which follow an index; clients sign up for a ‘green’ or ‘sustainable’ option only to find themselves invested in funds with exposure to mining businesses, but which are somehow still in an index.

The problem of greenwashing has reached a point where index providers, regulators, international bodies and even law enforcement are looking at it and are raising the possibility of a new mis-selling scandal somewhere down the line.

In May this year, Germany police raided the offices of the fund manager DWS as part of an investigation into greenwashing, prompted by the brave actions of Desiree Fixler, a former executive turned whistle-blower. Several commentators noted that the DWS case is unlikely to be a one-off. (4)

The IMF suggests that savers and investors should look harder at how their money is deployed and that proper regulatory oversight and verification mechanisms are essential to avoid greenwashing.

So, how does Castlefield tackle greenwashing? We believe our own experience in the sector and in-house research process puts us in good stead. As institutional investors, it’s about getting close to the companies we own as well as fully understanding the funds we invest in. It helps that our screening process excludes whole sectors where greenwashing is potentially more prevalent- the aforementioned oil and gas, mining and minerals.

The problem of greenwashing has reached a point where index providers, regulators, international bodies and even law enforcement are looking at it


With the companies and collective vehicles which come through our exclusionary filters and ESG analysis and make it into our portfolios, we maintain a continuous dialogue – usually meeting at least twice a year – so that greenwashing concerns hardly ever arise.

As participants in the market for ESG funds, we are concerned that some funds which make questionable claims about the ESG credentials of the products are purely attaching a green badge to a fund, attracting money to boost a firm’s assets under management and perhaps justifying higher fund charges due to its advertised approach.

Unfortunately, there are bad actors in most markets, especially one where many participants are keen to do something good. All we can do here is stick to our investment disciplines and reiterate our commitment to Thoughtful Investment.

Written by David Gorman

3. CFA Institute Certificate in ESG Investing Curriculum (textbook) V3 page 539