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How to avoid greenwashing when choosing an ESG investment

(Akil Mazumder/Pexels)

Investments in environmental-social-governance (ESG) ETFs are predicted to reach $135 billion before the end of 2021. Experts expect that level to increase up to $1 trillion over the next five years. 

The rising interest in an environmentally-focused investment portfolio has propelled the ESG investing market—which prioritizes companies who advocate for social equity and environmental issues—into the mainstream.

Alongside their lucrative financial prospects, the increase in attraction to ESG funds are due to their positive contribution to the environment and society. By assessing a company’s ESG metrics, investors can evaluate their contribution to sustainability and other important issues. 

Whether through mutual funds or ETFs, by focusing on companies who prioritize social justice and adopt environmentally-conscious practices, ESG funds allow investors to make a positive contribution with their investments. 

The proliferation of ESG investing has not come without its growing pains, though. With the rise of ESF investing, so has the unfortunate emergence of “greenwashing”—companies deceptively marketing themselves as being more “green” than they actually are.

ESG funds scope out a company’s commitment to ethical practices in numerous ways, including finding out how it’s managed, how much it dedicates to environmentally-conscious practices, how transparent its reporting structures are, and how supportive its policies are towards its staff.

Under the ESG umbrella, the “environmental” category refers to a company’s commitment to issues such as pollution and clean energy usage, “social” to issues such as labour practices and how it treats its employees, and “governance” informs investors on whether a company is committed to issues like gender diversity.

To work in the favour of investors, though, it’s important that ESG investing is focussed on transparency and accountability. The reality, however, is that for investors trying to pick the most suitable type of ESG fund, verifying claims and detecting potential fraud is not always an easily accessible process.

Not all funds that claim to be ESG-focussed provide a comprehensive appraisal of what is and isn’t actually certified ESG, though. As more ESG-focussed funds emerge, universal standards for ESG investing must ensure that standards and universal practices are applied so that investors are not deceived into buying into the greenwashing hype.

When deciphering which funds have a legitimate commitment to ESG, investors should look towards a fund’s actual prospectus instead of its marketing material. This is where they’ll find all of the important financial details about the companies they’re choosing to invest in.

They should also ensure they do a deep dive into the fund’s entire list of holdings to ensure there is an ESG-focus throughout the fund, not just for a few companies—there is a big difference between a coal miner and a wind energy company’s impact on the environment.

Nearly nine out of ten millennials say they want to invest in sustainable investments. ESG investing is a huge market and is on track to see rapid growth. With the abundance of ESG funds emerging, investors should remain savvy about whether ESG funds they are choosing are investing in companies aligned with proven ESG metrics, or if they are merely buying into a fund that only appears promising on the surface.

The post How to avoid greenwashing when choosing an ESG investment appeared first on Market Buzz - Get informed about the companies early investors are buzzing about.

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