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How to Avoid Greenwashing in Impact Investing

How to Avoid Greenwashing in Impact Investing

By SMU City Perspectives team

Rising environmental problems and concurrent increase in public awareness have influenced the uptake of responsible investments in sustainable organisations. Referred to as impact investing, it generates a financial return, more specifically when accompanied by a disclosed intention to draw and measure social and environmental benefits. Taking into consideration the environmental, social, and governance (ESG) factors of investment products, investors may work towards achieving a portfolio that aligns with their goals and values.

Impact investors play their part by addressing the most pressing global issues in various sectors. This can include contributing to renewable energy, sustainable agriculture, and making basic services like education, healthcare and housing more affordable and accessible.

Locally, the Monetary Authority of Singapore announced in June 2021 that it will deploy US$1.8 billion (S$2.4 billion) for climate-related investments. Driven by the prevailing COVID-19 pandemic, more Singapore investors are also beginning to put their money into social and sustainable causes.

To attract investors, asset managers who pool money through hedge funds typically endorse the United Nations Principles for Responsible Investment (PRI) to show commitment to broader societal objectives while increasing their credibility.

However, such investments may fail to deliver the impact they are meant to create. According to Hao Liang, Associate Professor of Finance at Singapore Management University’s (SMU) Lee Kong Chian School of Business, a significant number of PRI-endorsed hedge funds indulge in greenwashing.

“Hedge funds that greenwash underperform both genuinely green and non-green funds after adjusting for risk,” notes Prof Liang in a recent working paper titled “Greenwashing: Evidence from Hedge Funds”.

What is more concerning is that investors seem not to discern the difference between greenwashers and funds that actually make an impact. Prof Liang adds, “Despite trillions of dollars being invested in ESG and socially responsible causes globally, there is still limited knowledge about whether they really drive positive environmental and social changes.”

As a result, given the nature of some of these investments, investors may be vulnerable to greenwashing.

Greenwashing - A growing concern for investors

According to Robeco Asset Management, greenwashing is “the practice of trying to make people believe that a company is doing more to adopt sustainability than it really is, often for public relations reasons”. Asset managers who greenwash create a false impression for impact investors by claiming that the funds will draw a positive environmental or social impact when they do not.

According to Prof Liang, three key factors influence asset managers to greenwash.
According to Prof Liang, three key factors influence asset managers to greenwash.


“Many investors and asset managers realise that they can enjoy economic benefits by indulging in greenwashing without much cost,” adds Prof Liang. These benefits may include tax exemption for green bonds.

By presenting an environmentally responsible public image through false or misleading claims, organisations that greenwash can impact the investor’s ability to properly allocate capital towards their goals. It can affect the integrity of investments made in what investors otherwise believed to be sustainably operated companies or sustainable funds. The allure of greenwashers further attracts impact investors who are not achieving what they are investing for, both financially and socially.

How greenwashing affects impact investments

Key components of impact investments that differentiate them from other portfolios.
Key components of impact investments that differentiate them from other portfolios.


As greenwashing compromises the premises of intentionality and impact measurement, funders of impact investors may consequently be unwilling to select such causes to invest in. Concerns about greenwashing in ESG investment products have thus become more prominent. For instance, Social Capital founder and CEO Chamath Palihapitiya point out that for some, the ESG movement may be employed as a “marketing ploy and a way for companies to get free money.” Likewise, Christopher Hohn — hedge fund manager of The Children’s Investment fund foundation — previously called on big asset managers as being “full of greenwash”.

In response, more rules and regulations from the US, Europe, Japan, and Singapore may soon be introduced to combat greenwashing.

The “obscure and immature approaches of impact measurements” as Prof Liang describes, make it difficult to identify greenwashing activities. With inconsistencies due to rating agencies’ preferences and rating methodology in existing ESG measurements, this poses the challenge of measuring and assessing genuinely responsible investment products. The lack of guidance on measuring ESG for private equity spells greater problems, especially when most impact investments tap on these funds. So, how can investors have confidence in impact funds that are truly “green”?

How can investors avoid getting greenwashed

Currently, the general consensus is to steer clear of asset managers that underperform more when the incentive alignment is low. This is a key indicator of managers that greenwash. They are also likely to trigger more regulatory violations and report more suspicious returns.

Do the due diligence and research thoroughly to capture a more complete picture of any given impact investment. Investors can leverage tools such as the United Nations Sustainable Development Goals to measure impact performance. While greenwashing remains a prevalent issue in this field, investors should always look out for well-established impact measurement frameworks to effectively scrutinise investment products and ultimately make informed choices.

The role of SGFC in combating issues of greenwashing

To assist investors and financial advisors in Singapore, the Singapore Green Finance Centre (SGFC) will be producing a white paper to expound further on ESG measurements and standards.

Sitting on the SGFC management committee, Prof Liang says, “Our approach for doing this is developing an impact-weighted accounts framework. Impact can range from Direct Impact, Indirect Impact, Absolute Impact and Marginal Impact, and can be quantified and expressed in monetary units (e.g., in dollars).”

The findings will be shared when they are ready for publication. A case study on DBS Impact Measurement offers a glimpse.

On whether the increasing attention on social and environmental issues such as climate change will lead to more greenwashing practices, Prof Liang agrees that it is likely. Describing impact investing as a “booming and very promising” market, contributing to such funds can be of great value in investment decisions when employed correctly.

With the huge demand by asset managers and asset owners, an impact fund labelled as “green” or “ESG-focused” will continue to attract money flow. As this industry further gains traction, its success will lie in achieving consistent ESG measurements to overcome greenwashing and generate true social impact.