“Sustainable or not sustainable, this is the question that all responsible investors should ask”

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For many years, the greenwashing debate was mostly focused on consumer goods, namely on aspects related to packaging, fast fashion, and food labeling, among other issues. However, the wide range of sustainable investment products currently available in financial markets (motivated by an increasing interest of investors in sustainability) brought the greenwashing debate to the financial sector as well.

Just as when we go to a supermarket, we can choose between a sustainable or non-sustainable product, nowadays, investors are also able to choose between a sustainable or non-sustainable investment product. If consumers and investors do not identify with sustainability, both are free to choose a non-sustainable product and a non-sustainable financial product, respectively. However, the main problem arises when consumers and investors buy, respectively, products and investment products labeled as sustainable to fulfill their sustainability values, but these products and financial products are not sustainable at all. This is where greenwashing comes in!

From a financial point of view, greenwashing can be seen as a “practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants” (European Securities and Markets Authority, 2023). In this context, it is also important to note that sustainability-related misleading claims can be intentional or unintentional, and misleading communications can be due to the omission of relevant information and/or the provision of fake information. Furthermore, greenwashing can occur either at an entity level, at a financial product level, or a financial service level.

In the Final Essay of the Responsible Investing Towards Sustainability course at BSL, students are asked to choose a financial product labeled as sustainable (for example, a green bond, a social bond, a sustainability bond, a sustainable mutual fund, a sustainable ETF) and to analyze critically if this financial product is really sustainable or if it is simply the result of greenwashing practices. Besides the general features of the financial product (type of financial instrument, the investment policy, the profile of the typical investor, the total amount invested, fees collected, composition of the portfolio in terms of asset allocation, country allocation, currency allocation, and sector allocation) and its financial performance (provided by indicators such as price, rate of return, standard deviation, Sharpe ratio, and beta), students need to analyze the sustainability performance of the financial product as well. In the last edition of this course, the BSL’s student Tim Fischer analyzed the Vanguard ESG U.S. Stock ETF and explained below the reasons for having chosen this financial product and his main conclusions.

“I decided to focus my assignment on this subject when I stumbled across the Forbes ranking of the 8 Best ESG Funds of 2023. I was quite surprised to see a Vanguard fund in 1st position, despite the fund’s reputation and the criticism it has received for several years about its environmental impact. It will therefore be interesting to examine the methods used by this fund to call itself a “sustainable fund that follows ESG principles”.

I think it’s important to welcome the efforts made by Vanguard to create a new instrument based on ESG criteria, which is a step forward from what they are used to doing. However, their negative screening approach remains incomplete and needs to be refined. Indeed, there are still several discrepancies between the sectors selected to be excluded from the ETFs, many companies are present despite having a very low ESG rating, certain structural issues remain (such as the US Healthcare system), and the lack of an overall view due to the excessive number of companies in the portfolio.
All these factors, coupled with a lack of transparency and the absence of Sustainable Instruments that allow us to see the impact of our investment (ESG rating), mislead investors who think they are acting in accordance with ESG criteria. In my opinion, there is not enough to make this ETF a sustainable investment.

I found this assignment very intriguing, and I thoroughly enjoyed working on it as it aligns with numerous debates surrounding greenwashing. We are currently in a transitional phase where all stakeholders must endeavor to change their habits and move in the right direction, especially the finance sector, which funds all other industries. Indeed, they have the power to redirect capital towards more sustainable sectors; however, it is crucial for them to reconsider their short-term profit-oriented perspective.

Currently, every company/bank is free to act as it sees fit to achieve Net Zero goals. However, leveraging the ignorance of some actors by claiming sustainability while numerous contradictions exist undermines the cause and diminishes trust in our institutions. I hope that the European Securities and Markets Authority’s 2023 Greenwashing Law awakens many consciences and enables greater transparency regarding financial sector investments”.

References: European Securities and Markets Authority (2023). Progress Report on Greenwashing – Response to the European Commission’s request for input on “greenwashing risks and the supervision of sustainable finance policies” (ESMA30-1668416927-2498).https://www.esma.europa.eu/sites/default/files/2023-06/ESMA30-1668416927-2498_Progress_Report_ESMA_response_to_COM_RfI_on_greenwashing_risks.pdf

Tim Fischer

Student of the Responsible Investing Towards Sustainability course at BSL

Dr. Ilídio Silva

Professor of the Responsible Investing Towards Sustainability course at BSL