How to avoid greenwashing in 'sustainable' investing

This column is by Mark Ting, a partner with Foundation Wealth who helps clients reach their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast's guide to personal finance.

With "Invest in Our Planet" being the theme of Earth Day 2022, according to EarthDay.Org, many people could be inspired to increase the amount of sustainable offerings in their investment portfolios.

However, the word "sustainable" is very subjective.

For some, it refers to divesting of all industries linked to fossil fuel extraction while funding green initiatives, such as renewable energy or carbon capture technology. For others, "sustainable investing" is simply the integration of Environmental, Social and Governance (ESG) screens when making investment decisions.

In its simplest form, ESG screens exclude from investment consideration companies or industries that create products that have a negative impact on society, such as tobacco, gambling or weapons.

A major criticism of ESG or "sustainable" investments is the amount of greenwashing evident within the industry — the act of pretending you are doing things to address climate change without actually reducing greenhouse gas emissions.

Recently, several investment manufacturers have re-branded their mutual funds by incorporating the word "sustainable" in the title, but while the name changed, the funds' holdings and investment strategies did not.

One way to avoid investments that appear to be greenwashed is to look at their top holdings. For example, if there is a large oil company in the top 10 holdings of a fund that is marketed as "sustainable," don't be afraid to ask why — it might be an example of greenwashing, or the inclusion could be justified.

The oil company could have struggled passing the "Environmental" screen but excelled in the "Social" and "Governance" categories — making its overall score acceptable from an ESG standpoint for certain fund managers.

Rather than boycotting the company, an activist shareholder fund manager might attempt to improve the company's environmental track record by being a positive centre of influence — essentially, using their ownership stake to pressure the company into initiating polices to reduce its carbon footprint.

Options for those against high-carbon industries

Fortunately, for investors who are fundamentally against investing in high-carbon industries, there are plenty of options.

Rather than considering funds that are marketed as "sustainable," look for other key words such as: "fossil fuel-free", "low carbon", "climate impact" or "environmental leaders" in the investment's offering mandate. These funds tend to set a much higher bar when it comes to ESG.

If you are currently invested in a mutual fund and would like to know how it compares to its peers from a sustainability standpoint, fund rating website Morningstar has a sustainable investment funds screening tool.

This tool not only gives each fund a sustainability score but also shows the management fee and its past investment performance. It's a useful tool as it helps investors find fund managers with similar values and investment return expectations.

Whether sustainability screens help or hinder investment returns is still being debated.

However, most studies have concluded that ESG funds outperform over the long time — the theory being that companies whose boards or executives adopt strong ESG polices tend to be forward-looking and long-term planners. To use a hockey analogy: these companies are seen to be "where the puck is going, not where it has been."

Currently a lot of investment dollars are flowing to companies with strong ESG scores at the expense of companies with poor ESG scores. I believe this trend will continue as investors, businesses and governments have become very selective with who they partner with.

There is plenty of evidence to show that having a high ESG score isn't just a positive for the planet, but also for a company and their shareholders' bottom line.