What is greenwashing? In simple terms, it refers to a company sending misleading messages to persuade the public that they are having a positive impact on the environment. For example, a car company falsifying exhaust emissions data, or a food company claiming to use environmentally friendly packaging materialswhile the actual situation is inconsistent across their product line. These actions are considered greenwashing behaviours.

Meanwhile, ESG awareness is increasing worldwide. Most companies want to demonstrate they are a responsible corporation and achieve an excellent ESG rating. Companies that rush to put ESG labels on their products could exaggerate, or be open to misinterpretation. In some cases, firms did not intend to exaggerate or mislead the public, instead, they failed to keep pace with the constantly changing ESG regulations and customer needs, and the evolution of society’s definition of sustainability. After all, ESG is a fairly new concept, and there will inevitably be some flaws in the development of assessment and reporting.

Reducing greenwashing depends on the joint efforts of all parties. Companies should strive to improve transparency and integrity about the sustainability principles they apply to their products, so as to increase investor confidence and, in turn, enhance their ESG credibility.

On the other hand, regulators also need to be good gatekeepers and actively review whether companies have potential greenwashing risks. For instance, the European Commission announced in March this year that it would revise the EU consumer protection law to strengthen enforcement and review greenwashing incidents. Currently, many regulatory authorities require companies to include objective data and scientific evidence to support their disclosure of ESG-related content.

For investors, when determining whether a company incorporates ESG into their business, they should also do a thorough investigation instead of relying on one-sided statements. Investors could get an understanding of a company’s sustainability terms and guidelines through its annual ESG or sustainability report. The Securities and Futures Commission of Hong Kong has issued new guidelines on ESG fund disclosure last year to facilitate investors in identifying suitable ESG funds, thereby reducing the chance of greenwashing. On top of that, investors should not only pay attention to the company’s long-term ESG goals or prospects, but also take notice of whether the company has made substantial improvements in ESG performance in recent years.

Certainly not all retail investors have the expertise and time to distinguish between companies that are “genuine” about ESG and those that potentially have greenwashing risks. Therefore, finding a reliable investment partner is crucial.

A good asset management company should have a thorough understanding of the ESG metrics of the companies and products in its portfolio, such as analysing the company’s ESG status based on their sustainability or ESG reports, management reports and based on internationally recognised standards such as the Task Force on Climate-Related Financial Disclosure. Asset management companies can even require companies to transparently disclose ESG-related information by communicating with the management and participating in voting at shareholder meetings when necessary to advance the sustainable development process. Asset management companies also need to clearly explain the actual ESG performance of their products to investors through the ESG reports of individual funds.

In the long run, ESG should not be a label or marketing tool, but the objective the company is aligned to across all aspects of its business so that it can fully realise its potential for supporting sustainable development to make the world a better place.

There is no guarantee that actively managed investments will outperform the broader market. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks.

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