Ask five private markets investors what greenwashing looks like in action, and you can expect five different responses. But they will all come with the same caveat: you know it when you see it.
From our discussions with industry experts it is clear that the term “greenwasher” in private markets can be used to cover a broad spectrum of ESG transgressions. These range from clear-cut false advertising at one end, to more debatable positions at the other, such as when a manager displays “moral flexibility” by running a climate change mitigation strategy with one team and investing in fossil fuels with another.
According to the head of sustainability at one firm, avoiding the “say-do gap” has become their most immediate ESG concern. “As more firms claim that [ESG] is in their DNA, that it’s been part of what they do forever, that they’re leaders in this space, they’re going to shake out into different buckets of those that have a big say-do gap and those that don’t,” the investor told New Private Markets.
What investors consider to be “greenwashing” is still being worked out. Anne Simpson, who leads board governance and sustainability at the $489 billion California Public Employees’ Retirement System, compares greenwashers to the snake oil salesman of the 1800s. “The first litigation was complaining that there was no snake in the snake oil. The second wave of litigation was, ‘Hang on, this really hasn’t done anything, so it doesn’t work,’” Simpson told New Private Markets. “We’re in that two-part phase of the snake oil challenge to investing.”
Just because greenwashing comes in different shades doesn’t mean it’s overstated. It’s occurring in a new space where the necessary regulations are just now coming to fruition. However, the lack of clear definition creates the risk that managers with good intentions will be lumped together with those that deserve genuine sanction.
As Vikram Gandhi, founder of Asha Impact and a senior adviser to Canadian pension investor CPP Investments, told us recently, greenwashers are “disingenuous”, but cautioned investors to “let not perfect be the enemy of good”.
“In the big scheme of things, if 80-90 percent of assets in a portfolio are not being greenwashed and 10 percent are, and people start focusing on the 10 percent, that could be a bad thing as well,” he said.
Over the coming months and years, much of how the industry comes to interpret greenwashing will be decided by regulators. In Europe, this began coming into focus in March with the rollout of the EU Sustainable Finance Disclosure Regulation, which established the first set of rules specifically designed to clamp down on sustainability false advertising. The US also is taking its first steps, with the SEC issuing in April what amounted to its first greenwashing risk alert.
The risks to a manager accused of greenwashing come in two forms: reputational damage and, increasingly, regulatory scrutiny. The sooner the industry can agree exactly what a greenwasher is, the better.