So you want to be a climate-conscious investor. Here's how to avoid greenwashing

During a recent rally outside the University of Toronto, Saarthak Singh and Achint Singh joined the crowd urging the government to take action against climate change. But it's not the only way they advocate for a greener future. Both students also plan to make financial investments that will benefit the environment.

"Climate anxiety is at an all-time high," said Saarthak Singh. "How can I make sure that I'm also making a positive impact on the world?

Many Canadians are also letting their money do the talking. Assets in sustainable funds hit nearly $38 billion in Canada last year. But finding the right investments can be challenging: While a growing number of companies and funds claim climate-friendly credentials, many don't live up to their promises.

More transparency needed

Achint Singh decided to take matters into his own hands and founded a sustainable investment club on campus. They wade through pages and pages of documents to make their decisions about what to support.

"The information isn't easily available. It's opaque," he said. "It's not something that everyday people can just look up…. There needs to be more transparency and more clarity."

Making it easier for people to sustainably invest will have ripple effects, he added.

"It will snowball into a bigger movement … companies will have to begin to pay attention."

A number of companies and funds now receive environmental, social and governance (ESG) ratings. They are created by various commercial and nonprofit organizations, including MSCI, Morningstar, and the Global Reporting Initiative.

But Saarthak Singh does not think many of them are stringent enough, noting some oil companies are rated relatively well. He'd like to see ESG baskets separated so that companies and funds can be judged on environmental activities alone.

"Let's not give credit to companies which are selling their carbon, right?" he said.

Greenwashing concerns

Industry watchers have also sounded the alarm over greenwashing, a phrase which describes companies or funds that advertise themselves as more climate-friendly than they really are. InfluenceMap is a climate change think-tank that examined more than 700 funds that were marketed using ESG and climate-related keywords in 2021. It found that 71 per cent had companies within their portfolios that didn't align with global climate targets.

Daan Van Acker, who wrote the report, says that while there has been a crackdown on greenwashing, more action from government regulators around language and labels is necessary.

"Right now there's very little consistency or standardization of what it does or doesn't mean to be green," he said.

The federal government has proposed some green investing guidelines that define which investments can use the green label. But they carve out room for some high-polluting activities, recommending that oilsands activities can be labelled as "transition."

Environmental groups have criticized the labels, saying to describe oil and gas as sustainable at any level makes little sense.

Looking under the hood

"When it comes to marketing of green investments, it is a little bit of a Wild West," said Tim Nash, president of Good Investing, which provides research and coaching to green investors.

"It's really important that Canadian investors look under the hood of their investments to really understand what's inside the fund that they're about to purchase."

Nash points to a fund like the Franklin Clearbridge Sustainable Global Infrastructure Income Active ETF. He says an investor might assume it's a climate-friendly fund but would be "quite shocked" to learn it includes Enbridge.

"At the end of the day, they're a pipeline company," he said. "If we could get the whole industry on board to use the same terms and expressions, I think that would go a long way."

For now, experts have some simple advice for investors to avoid greenwashing:

• Know which companies are listed in green funds.
• Look beyond buzzwords, such as "sustainable," for specific phrases, such as "fossil-fuel free."
• Use screening tools like Morningstar that rate these funds on how green they are.