Talking Point  

How big an issue is greenwashing?

This article is part of
Guide to sustainable equity funds and investing

How big an issue is greenwashing?
(Reuters/David Gray/FTA montage)

As the world of sustainable investing grows, regulators have been making big strides in tackling greenwashing, with the UK and EU both introducing regimes for consumers to understand and identify the sustainable objectives of the funds they invest in.

Alex Matcham, head of wholesale distribution at M&G, says: “It’s really important that what is said to investors matches what funds do in practice, and that’s not just for sustainability themes.” 

While sustainability has been around for a while now, it is still considerably newer as a topic than equity funds more generally. 

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“As a result, some aspects remain more complex and harder to explain,” Matcham adds. “It’s important to get the right balance between being simple enough that investors can understand and not being so simplistic that an easy solution is being chosen over the right solution.  

“That’s challenging, and good quality regulation and regulatory action definitely has a role to play in helping investors navigate these products with confidence.”

Philippa Douglas, assistant manager of the Evelyn Partners Sustainable MPS, notes that sometimes companies might take shortcuts in how 'green' they present a company to be.

She adds: "New developments on climate change continue to grab headlines, such as how many of the hottest days on record happened in 2023. Businesses are aware of consumer concerns here, and sustainable credentials can be reputationally rewarding.

"Creating products and services that are compatible with a 1.5 degree world may require vast amounts of company resources, such as employee time or money. And passing those extra costs onto consumers can be unpopular.

"Presenting a business as being more green than it actually is can be tempting to keep costs low and reputation high."

This is where, according to Douglas, active sustainable managers can really show their value: by drawing on multiple sources such as independent data providers, assurance providers and investigative journalists to evaluate the integrity of company claims, or to uncover “if they are trying to spin a green yarn”.

AI revolution

Artificial technology has been touted as a tool that can tackle greenwashing.

Since the launch of ChatGPT the world has gotten very excited about the potential for AI to start a productivity revolution, especially as large language models – machine learning models that can comprehend and generate human language text – have become increasingly sophisticated. 

But Douglas says model outputs are only as reliable as their inputs.

 

“As the saying goes, ‘garbage in, garbage out’. A model, even a very large and complex one, is still a model, however.” 

“Publicly available AI is exceptional at instantly trawling the internet for relevant data, using sources such as news articles and companies themselves," Douglas adds.

“However you still need a human being to make a judgment about how accurate those conclusions of the AI model are, which can be unintentionally biased by the sources it gets its information from.”