Greenwashing: Investments Edition

Switching your bank account isn’t the only thing you can do with your money to help the climate. It’s just the first thing. If you’re investing money for the future, it’s important to invest it for a green future. And unfortunately, there are a whole lot of funds that sound green but are financing fossil fuels. If they’re using your money to pump more oil, dig up more coal or build even more natural gas power plants, then your money is being used to increase climate change.

The worst part about investment fund greenwashing is that they’re barely even trying, and yet they’re fooling heaps of investors. Fund managers slap “green” or “ethical” on investment vehicles that are full of fossil fuels, and investments come rolling in. They count on the fact that customers won’t look too closely at what the fund contains. Let’s unpack how they slip these dirty funds into the portfolios of customers looking for carbon-free investments.

Investing Can Be Scary. That’s What They’re Counting On.

Many people feel anxious when they’re looking to invest funds. After all, it’s a big decision; this is the money you’re counting on to keep you from being impoverished in your old age.  Investment funds come with a lot of information, often in barely comprehensible, buzzword-loaded fine print. It’s intimidating and overwhelming. Nervous sweat prickles the back of your neck, your heart pounds, and you feel nausea coming on as you try to make this consequential life choice.

But you’re determined to invest your money in a conscious way. So you breathe through the fear and look for carbon-conscious investments. No fossil fuels for you! The list of investment vehicles has a few that use terms like “ethical investing,” “socially responsible investing,” “ESG [environmental, social and governance] investing,” or “green investing.” And you pick those. Then, phew, breathe a sigh of relief, at least your money isn’t funding climate chaos!

And somewhere in a glass tower, an investment fund manager cackles, because they’ve fooled yet another investor.

Sustainable? In This Economy?

If you picked that fund because it said it was sustainable, well, that may not mean what you think it does. For example, the fund manager may define sustainable companies as “companies that invest money in technologies that can reduce greenhouse gas emissions.” This would allow them to invest in companies like BP, who are some of the worst climate offenders, but are investing money in companies working on carbon capture and storage. They can claim it's not a case of investment fund greenwashing, because their rules don't say that they don't invest in fossil fuels.

An analysis by Morningstar showed that only 30% of sustainable funds claim to be fossil free. But as we saw above, definitions matter, and their definition of fossil fuel free may not be your definition of fossil fuel free. Some of these allegedly fossil fuel free funds only restrict fossil fuel extraction, for example, meaning that they can fund coal plants. Most don’t have rules preventing investment in supplies for the oil and gas sector, like pipelines.

Morningstar’s analysis defined fossil fuel free more narrowly, rejecting funds with investment in “companies that derive at least 5% of their revenue from thermal-coal extraction, thermal-coal power generation, oil and gas production, or oil and gas power generation, or 50% of their revenue from oil and gas products and services.” Only 10% were fossil free by that definition, which still allows some investment in companies that earn a percentage of their revenue from fossil fuels.

And even though ESG funds have recently become a bogeyman in fossil fuel funding forums, scads of them still sink money into coal, oil and gas. As documented by The Guardian, several fund managers, including BlackRock and State Street in the US and Legal & General Investment Management in the UK, have ESG funds heavily weighted towards fossil fuels. But other funds may go all-in, only investing in companies that are authentically doing things to combat climate change.

Fakin’ ESG

ESG funds are supposed to fund a better world, right? But investing for better environmental, social and governance structures is broad and vague. Its very vagueness makes investment fund greenwashing easy. And despite the use of the word “environmental,” explains Morningstar’s Associate Director of Sustainability Research Alyssa Stankiewicz, “ESG is about risks to a company’s valuation, not about what it does for the community. It’s not about providing solutions for climate transition.”

A company that measures well on one criteria an ESG fund is aiming for (for example: fossil fuels) may do poorly on another (racial equity). As financial expert Matt Levine puts it, sometimes a fund that is looking to make an environmental and socially positive investment ‘”will have to decide whether to buy shares in an electric car company that exploits workers or an oil company with a really diverse board of directors.”

So before you invest, it’s important to understand what ESG criteria they are using to measure their investments. Do fossil fuels matter, or are they strictly looking for businesses that have high female representation, support racial justice, or live up to some other value?

And once you’ve found the criteria, you may need to look deeper. The US SEC has investigated a number of ESG funds for not living up to their pitches. While each fund under investigation has a prospectus that says it reviews companies based on a number of criteria, fund managers haven’t actually reviewed those companies. And that leads to ‘green’ funds that are anything but.

Green is Short for Greenwashing

Unfortunately, just because something is called ‘green’ doesn’t mean that it is. As Levine writes, there is “extremely simple financial engineering sleight-of-hand that goes into, like, taking an index fund and putting ‘ESG’ in the name, or taking an oil pipeline company and putting the word ‘Green’ in the name, or taking the World Coal Alliance and putting ‘Future’ and ‘Sustainable’ in the name.”

Sadly, this kind of investment fund greenwashing isn’t just hypothetical. In 2022, oil company Saudi Aramco launched an investment fund called “GreenSaif Pipelines Bidco” to raise financing for oil pipelines. Then investment managers included Greensaif Pipelines Bidco in several ESG funds. Why? They may have seen the word “Green” in the name, and saw that its industry was “ investment fund,” not “oil company.” Even though it was spun off by an oil company and its only purpose was to fund oil pipelines. Lesson learned: even if an investment is allegedly ESG, inspect carefully.

State Street offers several Fossil Fuel Reserves Free ETFs. Except – surprise! – they aren’t really fossil-free. Their rules say that they don’t invest in companies that have “proved and provable coal, oil and/or natural gas reserves used for energy purposes.” But they invest in GE, which has an entire division that builds gas power plants, thus increasing demand for natural gas. They also invest in many gas utilities, which definitely use natural gas for energy purposes. Analysis by Morningstar showed that these funds invest anywhere from 4.3 to 7.4% of the money into fossil fuels.

Ethical Funds Aren’t (Necessarily)

Similarly, just because the investment has “ethical” in the name doesn’t mean it avoids fossil fuels. For example, Vanguard’s Ethically Conscious International Shares Index ETF invests in gas distribution, as well as many of the biggest fossil fuel funding banks. The Azzad Ethical Fund does better, but it does invest in fossil-fired utilities.

What’s an Investor To Do?

If you aren’t an investment expert, it can be very difficult to find fossil fuel free investments. But there are a couple of tools you can use. Switching your investments and retirement funds (whether it’s a 401(k), Superannuation, KiwiSaver, RRSP or another fund) has a huge impact. UK organization Make My Money Matter estimates that, by switching to fossil fuel free investments, you will “cut your carbon 21x more than going veggie, giving up flying and switching energy providers.”

• US investors can use Fossil Free Funds to find, you guessed it, fossil free investment funds. Funds are graded based on what percentage of their portfolio is invested in fossil fuels.
• Canada has a similar tool, Fossil Free Funds in Canada.
• UK residents unfortunately don’t get a choice in pension funds. But you can apply pressure to your pension fund to devest from fossil fuels through Make My Money Matter.
• Ireland’s new pension scheme is launching as we speak, and once a tool launches to find green pension funds we will link to it.
• For Australians, Market Forces rates superannuation funds for coal exclusion, oil and gas exclusion and “exposure to Climate Wreckers” – the companies that are doing the most to destroy our chances of holding climate change to a minimum.
• If you’re in New Zealand, Mindful Money can direct you to a fossil fuel free KiwiSaver. The amount of money that KiwiSaver is pumping into fossil fuels doubled between 2021 and 2022, so by choosing a better KiwiSaver you can turn back that tide.

And if these tools aren’t enough, you can always do it the old-fashioned way! When you look up a fund, it should have an area where you can download all the businesses it invests in. The list is usually in Excel and can be quite long. But if you sort it by industry, you can quickly check to see if it’s invested in oil, gas, utilities, petrol stations, or other fossil fuels. This won’t catch something like Greensaif Pipelines Bidco, but in most instances, you’ll quickly get an understanding of whether the fund is fueling climate change. Choose accordingly.