With the sharply rising interest in sustainable investing around the world, and the proliferation of sustainable funds, investors face a serious challenge. How do they determine a fund is truly managed according to responsible criteria vs. one whose sustainability principles are superficial, inconsistent or poorly construed — a situation known as "greenwashing?"
The Global Sustainable Investment Alliance estimates sustainable assets under management in key regions have grown 34% during the past two years, reaching $30.7 trillion in 2018. To capture this demand, investment managers have launched more than 100 sustainable funds in the U.S. alone during the past three years.
Despite — or perhaps because of — its growing popularity among institutional and retail investors, sustainable investing can be defined in many different ways. Also called socially responsible investing, it can encompass impact investing; the application of environmental, social and governance criteria; negative screening; and other strategies. There are more than 150 providers of research, ratings, rankings, indexes and labels used to determine whether specific investments qualify as sustainable. Accordingly, SRI ratings of investments can be inconsistent due to differences in data collection, analysis and reporting.
We believe investors should consider four key questions to cut through the sustainable investing confusion and avoid greenwashing.