When purchasing a bottle of water, you may read a similar wording on the label: “respecting the environment”.
On TV, a car company could offer you a brand new “Diesel green” car in big letters and the tag on a floral top in a clothing store could be defined as “eco-friendly”.
It matters little, in fact, that the bottle constitutes plastic pollution, that the diesel engine in question emits up to 20 times more nitrogen oxide than petrol engines, or that the production of clothes in the fast fashion industry contributes to environmental degradation .
Since being sustainable has become a trend, corporate greenwashing has become an everyday practice.
Greenwashing is a certain type of communication that aims to show companies as more sustainable than they are. It comes in many different forms, including ‘greenwishing’, when financial institutions truly believe in their ‘promise’ of sustainability but fail to achieve the communicated and desired impacts and results.
The phenomenon of greenwashing affects a growing number of sectors and is critical as it can undermine investor and consumer confidence. The risk is that, if not adequately countered, greenwashing could lead to a misalignment between investor expectations and companies’ actual sustainability practices. This could result in significant reputational damage for the companies involved and a possible decrease in investments in sustainable financial instruments.
ESG (Environmental, Social and Governance) investments are currently enjoying some success – Bloomberg data say that globally, the masses invested in ESG ETFs went from 7.2% at the end of 2022 to 7.4% at the end of 2023, for a total of 600 billion dollars in assets in 2023 compared to approximately 100 billion in 2019.
The downside, however, is that these investments could suffer the consequences of misleading marketing.
According to the new guidelines from the ESMA (European Securities and Markets Authority) last May on the classification of ESG funds, over 4,000 European funds whose names include terms such as ESG or others linked to sustainability may not be truly aligned with ‘green’ parameters ‘. If these funds, which only include equity funds (thus excluding bond ones from the analysis), were to retain their current name, it is estimated that this could cause disinvestments in the equity sector of up to $40 billion.
And Europe? The new laws on greenwashing
The sustainable investment sector is as young as it is promising. As this is a relatively new world, regulation is also constantly evolving.
Despite problems such as lack of data, lack of uniformity of investment techniques and greenwashing, the European approach to ESG investments remains active and dynamic, and the search for practical solutions to the sector’s critical issues is incessant.
Regarding consumer products, the European Commission proposed in March 2022 to update EU regulations to protect consumers and support the green transition. MEPs approved the deal in January 2024, with the usual 24 months for EU countries to incorporate the update into their national legislation.
The new rules aim to make product labeling clearer and more reliable by banning the use of generic environmental claims such as “eco-friendly”, “natural”, “biodegradable”, “climate neutral” or “eco” without providing evidence.
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Furthermore, the directive will prohibit companies from claiming that a product has a neutral, reduced or positive impact on the environment thanks to emissions compensation schemes.
These new laws therefore aim to act directly at the source regarding the problems related to greenwashing: in fact, they aim to have a decisive effect on the ignorance and naivety of the consumer.
Regarding the world of investments, however, in 2018 the European Commission established a global strategy to further link finance to sustainability.
The aim was mainly to reorient capital flows towards a more sustainable economy by establishing a clear and detailed EU taxonomy, i.e. a classification system for sustainable activities.
Part of the plan is also to integrate sustainability into financial advice: in 2019, the Commission published draft rules on how advisers and insurance distributors should take sustainability factors into account in their work. Among the objectives: integrating sustainability into risk management, ratings and market research; clarifying the duties of asset managers and institutional investors in relation to sustainability; strengthening sustainability disclosures and the development of accounting standards; promoting sustainable corporate governance and mitigating short-termism in capital markets.
But in Europe there are still many steps to be taken in the “green” direction, mainly to clarify what it means for investments and portfolios to be ‘sustainable’ across the entire supply chain of the products concerned.
A significant step was the introduction of the Sustainable Finance Disclosure Regulation (SFDR) by the European Union. This regulation, which came into force in 2021, aims to improve transparency in the market for sustainable financial products, thus reducing the risk of greenwashing.
The SFDR requires financial companies to disclose detailed information on the integration of sustainability risks into their decision-making processes, as well as the negative impacts of their investment activities on ESG factors. Furthermore, it forces financial products to be classified into three categories: products that have sustainability objectives, products that promote environmental or social characteristics, and other financial products. This classification allows investors to make more informed choices and to trust more the sustainability declarations provided by financial institutions.
The SFDR represents a crucial step forward in creating a more transparent and sustainable financial market, encouraging companies to improve their sustainability practices and more clearly and accurately communicate their environmental, social and governance impacts.
However, full implementation and achievement of the objectives of the SFDR require ongoing commitment from all stakeholders, including regulators, financial companies and investors.
ESG investments according to Moneyfarm
The ETFs that make up Moneyfarm’s socially responsible portfolios are selected and monitored using a standard set of ESG metrics and a proprietary model that leverages five criteria.
- Risk reduction: reduction of financial risk deriving from sustainability factors through the improvement of the ESG rating provided by MSCI, according to an approach of negative screening on low ratings and best in class on high ratings – where the MSCI rating allows companies to be analyzed underlying the investment from the point of view of the risks and opportunities deriving from social and environmental sustainability factors.
- Attention to social aspects: reduction of portfolio exposure to companies with negative social externalities – which involves the total exclusion of companies exposed to severe controversies and not in line with international standards UN Global Compact and International Labor Organization – and selection of ETFs aligned with universal values and reducing exposure to controversial sectors such as tobacco, gambling and weapons.
- Climate Prioritization: Improvement of the aggregate climate impact of the portfolio, through measurement of average CO2 emissions and an improvement in the alignment of the portfolio with the Paris Agreement. The portfolio is constructed by favoring instruments that exclude from the investable universe companies whose revenues derive from the extraction of fossil fuels such as thermal coal; where possible, instruments that select companies with lower CO2 impact according to a best in class approach are also preferred.
- Active Exposure: Increase exposure to revenues from companies aligned with the UN SDGs.
- Issuer activism: other things being equal, preference is given to ETFs from issuers with the highest level of activism.
Moneyfarm offers many ways we can help you align your investments with your sustainability preferences, both through our ESG portfolios and our sustainability thematic offering. If you would like to discuss these options with our team of investment advisors, please do not hesitate to book an appointment.
*Investments in financial instruments are subject to market volatility and may result in the loss of all or part of the capital initially invested.
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