Financial Advisory

24 June 2021

Advisory DistributorsClientEngagementEnvironmentalESGFinancial AdvisorygovernanceGreenwashingvalueVirtual

Expert: Sora Utzinger, Head of ESG Research, Aviva Investors and Facilitator Mandy Kirby, City Hive Network

Key Takeaways

  1. There are three types of greenwashing to look out for; those aiming to boost a company valuation, those focusing on only positive news and hiding the negative, and at the product-level via ecolabels that lack substance 
  2. Engagement can be a powerful tool to maintain a dialogue with a company, but to be effective it needs to have objectives, be time-bound and have some measurable outcomes. Collaboration is very important for smaller players to maximise their potential influence through common aims
  3. Investors should work harder to create a simplified and single set of language to talk about engagement, to enable clearer conversations with clients 


Greenwashing activities are token gestures that are used to create the impression that a company or investor is doing more around sustainability than is the case, in order to convince other investors, wider stakeholders and customers. This can include putting the focus on tangential activities that don’t have a large sustainability impact, or sharing only positive information. 

The risk is that clients, stakeholders and the public perceive that more progress is being made in key sustainability areas than is the case, creating a false sense of reality and possibly complacency. This has the potential to turn into a legal risk in the future, for example, if advisers are seen as having failed to fulfil client requirements as per the Financial Conduct Authority’s product governance requirements. 


As ESG has become part of the mainstream, so has the existence of concepts around greenwashing. This can be considered as a range of activities that are token gestures generally used for public relations objectives, to help to convince investors and other stakeholders that either companies or investors are doing more to achieve sustainability goals than is the case.

There have been a few high-profile examples to point to where firms have been confronted with behaviour that looks like greenwashing; for example, energy firms that embarked on campaigns putting the onus on consumers to address climate issues, which then had to be walked back because they hit the wrong note with consumers.

There are also cases where investors make theatrical gestures such as the exclusion of sin stocks, but are doing little with the rest of a portfolio. It is important to be able to identify greenwashing behaviour, to ensure investors have the full range of information for investment decision making. 

1. How to spot greenwashing

There are three broad categories of greenwash that investors can look out for. One would be disclosures that focus on information intended to boost a company valuation, but that when examined are very narrow in impact (if at all) and touch on tangential issues rather than those structural to a business. An example would be a focus on a coal mining company switching from halogen to LED lightbulbs in their head office.

A second category would be where a company only publishes information that demonstrates positive ESG outcomes or activities, ignoring the negative. Finally, investors might get tripped up by shiny eco-labels that enable a product to appear to have green credentials, but further examination shows a lack of substance, requirements or controls.

2. How does company engagement help?

Engagement is one of the main ways that investors have to tackle greenwashing, because it should be part of a long-term relationship that investors have with investee firms. It takes the form of ongoing contact and information exchange with a company, and may include the investor requiring certain data, or that the company meet certain objectives over a long period of time. Engagement is a key aspect in setting expectations and recognising change over time.

Done well, engagement helps with the governance process in companies and is an important part of oversight. However, it has not always been that case that engagement is effective with regards to sustainability topics. Often, engagement lacks an objective, or any kind of framework that sets expectations for change over a set time period. It should have markers for success and it should have consequences for failure. At the end point, that should lead to disinvestment where engagement has been exhausted. Yet, it can be difficult to establish objectives with companies and it is often a challenge to effectively measure extra-financial information.

Investors can take time over this process, however. Setting expectations should start with a conversation, the investor sharing their process and asking questions that it will be aware that the company may not be able to answer at first. This will enable to company to start data collection. 

3. Why does this matter?

Not only is there a risk that investors are acting without a full set of information if they fail to ask good questions and set expectations for company dialogue, they may also be at risk of regulatory failure. The EU’s Sustainable Finance Disclosure Regulation that came into force in March 2021 requires that fund managers provide information on ESG risks in their portfolio, and to categorise funds as sustainable or non-sustainable. Further regulation is to be expected in the sustainability arena, for example to tackle the grey area that most engagement falls into – there is currently no firm regulation on standards for the outcomes or impact of engagement (although some standards, such as BSI PAS 7341: 2020, set out expectations on how to carry out engagement effectively). 

And investors also need to be mindful of the existing agnostic regulations, such as the FCA’s product governance regulations.

4. The client perspective

Engagement is also the conversations with more than just investee companies, it covers conversations along the investment chain and with related stakeholders. This means, as noted, identifying client beliefs and needs, to be able to understand both how to construct portfolios or products that will deliver to a set of identified objectives.

Talking to clients about what they are trying to achieve to understand their beliefs and how this translates into action in their portfolio is key. This could be setting objectives including on carbon intensity, or having ESG aligned solutions. It also means selecting managers that are appropriate to execute actions to meet their objectives. But some feel that the language and terminology around engagement specifically and ESG more generally, can be confusing and should be simplified and harmonised. This would allow more effective conversations with clients on the type of impact and outcomes they want to see, rather than getting buried in the weeds of specific topics.

There are a number of collaborative groups that help with large-scale or difficult engagement areas, especially around climate goals. These have had success in changing behaviour with large emitting companies. Collective action around shareholder activism has also been successful on topics from climate to remuneration. But it takes time and effort to organise such collaborations, and often relies on a large investor with enough resources to assist the process that smaller investors could otherwise not resource. This should be an area where investors are looking to collaborate to create a race to the top.