Are investors doing enough to curb greenwashing?
In "Unveiling the truth: greenwashing in sustainable finance", Juan Dempere, Ebrahim Alamash, and Paulo Mattos provide a framework for understanding the mechanisms of greenwashing in sustainable finance.
The authors underscore the need for more rigorous ESG due diligence by responsible investors and the importance of looking beyond ESG ratings when assessing companies' sustainability practices.
They observe that:
- Greenwashing strategies across industries include ambiguous language, irrelevant claims, and opacity in environmental reporting.
- Companies excluded from the MSCI ESG Leaders index experienced a 19.6% reduction in equity stakes held by ESG index funds and were 20% less likely to be held by funds tracking MSCI ESG indexes.
- Following exclusion from the ESG index, excluded firms increased their toxic releases by 28.7% compared to control firms, primarily driven by higher air emissions.
- Excluded firms were 8.3% more likely to open new polluting plants, indicating that the increase in pollution came from expanding operations rather than changes in abatement activities or productivity.
- The effect was strongest for firms with large BlackRock holdings prior to exclusion, suggesting reduced monitoring efforts by the fund family drove the environmental performance decline.
- Index exclusion did not significantly affect firms' cost of capital, valuations, or financial performance, indicating the environmental changes were not driven by financial constraints.
This study suggests a need for more stringent regulations and standardised reporting requirements to mitigate greenwashing and ensure the integrity of sustainable finance products.
The study's focus on index exclusion effects may however not fully capture the nuances of active ESG integration and shareholder engagement strategies employed by responsible investors.