Latest claims of passive fund “greenwashing” ring hollow – and they don’t help

Media outlets have focused attention on a report issued this month by French NGO Reclaim Finance, entitled “Unmasking Greenwashing:  A call to clean up passive funds.”  The study concludes that most passively-managed (or indexed) investment funds claiming to be “sustainable” in fact hold securities issued by fossil fuel developers, rendering the funds’ sustainability claims “misleading.”  According to the authors, “[s]uch misleading sustainability claims should be a wake-up call for institutional investors who are in danger of being implicated in organized greenwashing.”  

As with similar “greenwashing” reports issued in the past, the latest study suffers from a basic flaw in methodology.  The authors treat any fund with “ESG” or a similar term in its name as a “sustainable” fund, and then simply assume that holding securities of a company engaged in exploring for oil, gas or coal is necessarily contrary to the use of that name.  This logical leap ignores the fact that ESG-denominated passive funds track an underlying ESG index with a defined methodology.  These fully disclosed methodologies may or may not involve strict screening out of fossil fuel companies.  

In short, the study is built on the flawed premise that an ESG-focused fund is greenwashing simply because its defined (and disclosed) indexing methodology does not fully screen out fossil fuel companies.  While the authors may believe that all such indices should exclude these companies, that does not mean that the index (or a fund tracking it) is misleading investors because it doesn’t do so – especially when it doesn’t claim to do so.    

It is no secret that ESG-focused asset managers already face heated political pressure from the right in the U.S., founded on the false premise that managers are “boycotting” fossil fuel companies and “colluding” with one another to do so.  While the desire of climate-focused NGOs to create some countervailing pressure in the other direction is perhaps understandable, it’s not ultimately productive for them to do so by irresponsibly throwing around another loaded label like “greenwashing” based on different but equally false premises.  

There is certainly room for an informed and honest conversation about what role fossil fuel companies may have in a lower-carbon future, as well as about the investment risks and opportunities presented by the inevitable transition.  There is also room in the marketplace for a variety of ESG-related investment products that match the array of different investor preferences regarding investment and ESG-related goals.  Managers should be allowed to serve their clients’ various investment demands with a broad product set, without being subjected to unsupported and unfair labels from either end of the political spectrum.  

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