‘Greenwashing’ is a symptom of an investment industry moving in the right direction, but it’s up to investors to insist on more clarity and transparency from companies billing themselves as ‘sustainable’.
“It’s so easy for marketing departments to stick pictures of wind turbines and wind farms in presentations, so you’ve got to ignore the superficial stuff and really get into the nuts and bolts,” Tim Crockford, senior fund manager at Regnan, said during a discussion at the Fiduciary Investors Symposium.
“But it’s not really frustrating, because ultimately we want to divert capital into these areas, and ‘greenwashing’ shows businesses know this is what the market wants and thinks is important.”
Greenwashing is apparent when an organisation spends more time marketing themselves as environmentally sound, rather than actually minimising their environmental footprint.
“The risk with greenwashing is you throw fuel on the fire of cynicism that some investors have towards these strategies, when they discover nasty surprises when they get into the weeds and do their due diligence,” Crockford said.
“Understanding the management and the culture is the clearest way to see whether a company has a strong environmental premise, or is just renaming its negative externalities.”
One way to circumvent greenwashing is to directly target companies producing products or services that contribute to a low carbon future, rather than companies that are attempting to transition.
“We look specifically for pure-play mission-driven businesses with sustainability at their hearts,” Crockford.
“They have tangible and realistic plans to report and communicate their negative operational footprint, and will take on feedback about how they can improve.”
Pointing to Amazon and Google, Crockford explained how they arguably exist to solve problems that aren’t of environmental or social change.
“While they’re great companies, and are broadly spread across retailing and marketing areas and product lines, it’s always going to be a challenge to line them up to address their negative impacts,” Crockford said.
“That’s because they are not aligned with a sustainable intention. We are looking for businesses that are aligned with that intention from the start.”
The relationship between investor and management has always been critical, but Crockford said engaging with company leaders about their environmental impact needs to be realistic.
“Unless you’re taking a majority stake and can really be an activist investor, we need to be realistic about whether you can turn a negative, harm creating industry around 180 degrees,” Crockford said.
“By all means be ambitious, but we spend a lot of time pre-investment assessing whether there’s potential to drive positive change through engaging with management.”
Communicating and questioning the business’ direction is much simpler when management is developing positive products and services in their own right.
“Conversations become much more collaborative when there is open disclosure and transparency, especially when it comes to reporting,” Crockford said.
“We’ve had companies contact us asking what metrics we need to see how they’re improving, and that leads to investor’s getting involved.”
That said, Crockford pointed out there is no such thing as the ‘perfect asset’.
“You’re never going to find an investment that ticks all the boxes,” he said.
“There will always be trade offs, and there will always be negative impacts, but understanding the scale of those impacts and creating a framework to reduce them is how we will improve over time.”
Crockford said the markets are maturing, and while it’s a steep learning curve, once companies and investors move up the curve, there is a broader understanding of what it means to be a sustainable investment or business.
“Investors are looking much deeper to understand the underlying objectives and strategies, which bodes well for directing capital into companies that are changing the system.”