Whenever I write an essay or a blog on any topic, I usually begin by describing and defining the concepts I’m talking about. I started this blog optimistically – ‘ah yes, of course I know what greenwashing is, that’ll be easy to summarise’. However, I quickly realised that, in fact, there is no one concrete, official definition of it.


Greenwashing is referenced in many of the EU Regulatory frameworks, but the various current definitions have been deemed insufficient by the European Commission.


Where did the term ‘greenwashing’ originate?


In 1986, environmentalist Jay Westerveld coined the term “greenwashing” in an essay criticising the “save the towel” movement in the hotel industry. He said that hotels were simply trying to reduce costs by not having to wash towels. There were no visible signs of efforts being made to become more sustainable in any other areas of the hotels*.


Now, almost four decades on, the term is part of everyday parlance when talking about the action (or inaction) that companies and investment funds take towards sustainability.


About The EC Report


In 2022, the European Commission (EC) asked the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) to prepare a report on greenwashing risks and the supervision of sustainable finance policies. I will refer to this as as “the report” from this point forward.


The EC requested four specific outcomes. One of these was to define greenwashing and detail the forms it can take in the financial sector.


The 90-page report put forward this comprehensive suggestion for the definition of greenwashing:


    “The term greenwashing risk refers to the risk of misleading sustainability claims occurring and misleading investors in their decisions; the term greenwashing-related financial risk refers to the broader financial risks greenwashing occurrences may pose to entities, financial markets and investors.”1


Sustainable investing is a fast-growing beast. I recently attended the ESG Summit in Croke Park and the slides from Aidan O’Mahony, Head of ESG at Goodbody, were phenomenal. One detail that stood out to me was the amount of money invested in sustainable funds.


He told us that sustainable funds now account for 57% of the European fund market (at 1Q23). By contrast, they only made up 37% of the market at the beginning of 2022.


Similarly, according to Morningstar, $2.74 trillion was held in sustainable funds at the end of March 2023, compared with $929.9bn in 2020.2


Despite the growth in sustainable accounts, greenwashing remains to be one of the biggest barriers when engaging with responsible investing.


Greenwashing in action


Greenwashing can occur either intentionally or accidentally.


The report outlines the various ways in which a claim can be misleading. I’ve seen most of the examples cited in the report first-hand while researching a responsible investment alternative for Metis Ireland.


Here’s a summary of the key ones:


Misleading or suggestive non-textual imagery and sounds


At Metis Ireland, our investment philosophy centres on passive investment. However, I reviewed both active and passive options when researching the Metis Ireland Sustainable Strategy. Most of the active investment managers I approached used this tactic excessively.


Misleading naming practice


Recently there’s been a surge in funds with the term ESG in their name. I urge you to perform due diligence here. Make sure you’re happy with the ESG level and the fund’s objectives.


In many cases, sticking ESG in front of their fund name has simply been used a marketing tool. Dig a little deeper before you commit.


Misleading SFDR labelling


I must admit I fell for this one myself. Therefore, I was delighted to see it called out so clearly in the report:


    “Furthermore, despite the fact that SFDR is a disclosure regulation, the market has been using SFDR as a labelling regime built around three categories at product level. […] It’s important to note that this market practice should be discouraged as it is a misuse of SFDR classification.”3


Selective disclosures of hidden trade off (‘cherry-picking’)


For me, this ties into the SFDR labelling point above. I’ve reviewed funds where an exclusion policy was being implemented, but the benchmark didn’t specify the potential financial or ESG trade off that had been made.


Despite the main aim of the fund, greenwashing can still occur and unfortunately the investor can be misled.


Lack of fair and meaningful comparisons and assumptions


Fund Managers can make claims on impact. However, there’s currently no measurement of how that impact was achieved.


    “Greenwashing risk can also occur in the form of exaggerated claims made by benchmark administrators about the real-world impact of their ESG benchmarks. […] For instance, impact claims can be misleading when benchmarks are either just applying exclusions or are constructed using backward-looking ESG ratings. The misleading qualities linked to this situation include selective disclosure (namely cherry-picking), ambiguity, inconsistency, omission and lack of meaningful comparisons and thresholds. One relevant example of such misleading impact claims is when a benchmark administrator implies that an ESG result or metric (e.g., low carbon footprint relative to a broad non-ESG benchmark) is achieved as a direct consequence of the strategy of the benchmark when it might sometimes just be the result of the intrinsic characteristics of the investable universe or of the benchmark design. An illustration of exaggeration and lack of proof is a statement such as “Our ESG benchmark invests in environmentally innovative companies. By selecting it, you reduce greenhouse gas emissions by 25% compared to an investment in a broad market index.” 4


The rating agencies used by the different investment managers vary. This poses a further challenge when trying to compare different fund offerings.


In mid-June, the EU released a statement which detailed the package they’re proposing to ensure that the 2018 EU Sustainable Finance Framework continues to support companies and the financial sector. The EU says they’re reviewing the ESG ratings market and will be introducing rules on ESG agencies’ operations.


Lack of ESG Expertise


My starting point was to familiarise myself with the EU Taxonomy and the SFDR Regulation (you can read my explanation of these here). Under SFDR regulation, the fund manager must publish the split of their investment strategy between ESG vs non ESG assets of the fund on their website.


I assumed that this would be widely available – I was very wrong! A further complication is that the UK has their own sustainable regulations, since they are now outside the EU.


How do we prevent greenwashing?


There are several regulations in place which aim to prevent greenwashing. These include CSRD, SFDR, and EU Taxonomy Regulation. Revisions are being made and regulations are being introduced with increasingly frequency. Hopefully, as a result of this, the potential for greenwashing should recede and confidence in the ESG regulatory landscape should continue to grow.


Along with defining greenwashing, ESAs will be reviewing impact. I believe this will also lead to substantial progress.


What next?


You may interpret this article as if I’m against sustainability, but it’s simply healthy scepticism – at Metis Ireland we will highlight both the good and the bad.


There’s no doubt that significant progress that has been made. However, I believe there’s still further to go – the EC agrees with this.


Anyone in financial services or with an interest in sustainability should read the Progress Report published by the ESAs. I look forward to reading the final reports by the ESAs on greenwashing in May 2024.


Mary Carney
Financial Planner


* In related news on the hospitality and sustainability front: The Armada Hotel, where we are hosting our Future You event in September, was recently certified as Ireland’s first B Corp.




1, 3, 4ESMA Progress Report on Greenwashing: https://www.esma.europa.eu/document/progress-report-greenwashing


2Financial Times: https://www.ft.com/content/b4eaf375-6141-45a7-9f30-d9462605c01f



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