Green Finance, Member Exclusive

Green Finance Briefing: Greenwashing on Wall Street, and climate tech stocks outperforming the market

  • Regulators have started to investigate misleading ESG claims at big banks, signaling that they’re paying close attention to the wave of greenwashing happening in finance.
  • Elsewhere, climate tech stocks continue to outperform the market, and UN Secretary General Antonio Guterrez bemoans the counterproductive attitude of the finance industry towards climate change.

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Green Finance Briefing: Greenwashing on Wall Street, and climate tech stocks outperforming the market

Greenwashing on Wall Street

Regulators are cracking down on misleading claims at big banks, signaling that they’re paying close attention to the wave of greenwashing happening in finance. Goldman Sachs is the latest target of an SEC investigation, following the greenwashing probes into BNY Mellon and DWS earlier this year. 

ESG is the latest fashion trend to take over Wall Street – ‘green’ products are in this season, and many banks responded to the increasing demand by offering ‘sustainable’ investments. 

I’ve argued before that ESG is currently more about the hype than actual value-aligned investing. Despite growing increasingly popular, the unregulated world of sustainable investments is not always what it's cracked up to be.

Initially, the pressure was coming from institutional investors that were looking for more environmentally friendly ways of investing, according to financial regulation expert and president of FrontLine Compliance Amy Lynch, but that has now expanded and spun over into the retail sector. 

“It's the hot new thing, and everyone's trying to get in and profit off of it,” she said. 

But considering there are no rules, how did we get to greenwashing investigations?

Greenwashing occurs when companies overstate or misrepresent their climate credentials or their ESG commitments. The only weapon the SEC has at the moment is a company’s own disclosures and definitions – if the firm followed its own internal policies and procedures. 

“If you are marketing a fund as following a certain investment guideline or having certain restrictions placed upon it and then not doing that, it will end up pointing in the direction of a fraud charge, since the marketing will be deemed misleading,” Lynch told Tearsheet.

Essentially, if a bank labels and markets a fund as being ESG, this has to follow its own definition of what ESG means. Failing to follow internal guidelines can be deemed as fraud.

This rationale has been fueling the crackdown on misleading ESG claims – regulators want to see if banks are actually following the protocol they promised to investors.

Two weeks ago, the SEC launched an investigation into Goldman Sachs over its ESG mutual funds. The firm manages at least four funds that have clean energy or ESG in their names, the WSJ reported.

“Now that the growth stock rally is over, investors are blaming greenwashing on companies not living up to ESG goals. Goldman Sachs could have stayed out of the papers if ESG labels weren’t just fashionable, but rather a true reflection of a fund’s strategy,” said Maria Lozovik, co-founder and portfolio manager at UK-based Marsham Investment Management.

This is the latest example of regulators honing in on greenwashing. Last month, BNY Mellon was fined $1.5 million following an SEC investigation over misleading statements around ESG investment criteria. 

“The SEC went into the case with a heavy hand, but they ended up realizing all they could do was give them a slap on the wrist, because the lack of regulation worked against them. There were no real egregious wrongdoings; no shareholder was truly harmed by this,” Lynch said.

While this is a minor case for the bank considering the small price it had to pay, it was a strong signal from the SEC telling the industry it’s looking into greenwashing.

But even if so far the consequences have been small for US banks, things are a bit more serious in Germany. Authorities raided the Frankfurt offices of Deutsche Bank and its asset management subsidiary DWS amid allegations around misleading ESG claims, resulting in the resignation of DWS CEO Asoka Woehrmann.

This shows that the future could hold some unexpected consequences of the ESG investment practices that took place over the past two years. Regulators are sending a clear message that greenwashing and ESG are top priorities. And given that interest in this space is only rising, they probably have a lot of work on their hands…

Chart of the week

The EIP Climate Tech Index continues to outperform the market, but it’s also showing quite a bit of volatility. The index aggregates relatively big, publicly traded players in climate tech and was created by VC Energy Impact Partners.

Quote of the week 

“We seem trapped in a world where fossil fuel producers and financiers have humanity by the throat. For decades, the fossil fuel industry has invested heavily in pseudoscience and public relations – with a false narrative to minimize their responsibility for climate change and undermine ambitious climate policies. They exploited precisely the same scandalous tactics as Big Tobacco decades before. Like tobacco interests, fossil fuel interests and their financial accomplices must not escape responsibility.” 

– António Guterres, UN Secretary General 

What we're writing

Investment is growing in the climate tech sector

A new generation of climate techs is emerging, creating innovative ways for businesses of all sizes to manage carbon emissions monitoring and reporting, and ultimately drive emissions down.

The SEC steps in to regulate ESG

US regulators are starting to hone in on greenwashing, proposing a new set of disclosure requirements on ESG funds. And truth be told, there’s a lot of cleaning up to do.

How banking CEOs are focusing on sustainability, in 4 charts

Sustainability has started to enter the corporate agenda, rising towards the top of the priority list for an increasing proportion of banking and finance chief executives.

What we're reading 

The one way to avoid greenwashing in ESG investing (Bloomberg)

How ESG investing came to a reckoning (FT)

Comparing sustainability regulation across the US, the EU and the world (SustainableViews)

What are carbon offsets and how many really work? (Bloomberg)

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