Greenwashing practices among mutual funds

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Investing Author Larry E. Swedroe has recently commented on the growing trend of ESG investing. Despite the positive social and environmental expectations associated with such funds, Swedroe calls for caution.

Recent research identified the practice of adjusting low-performing funds’ into ESG one. In several cases, this practice is self-designated and inappropriate because the funds’ holdings are still very similar to non-ESG peers. For instance, a study published by Markku Kaustia and Wenjia Yu – Greenwashing in Mutual Funds – has investigated mutual funds’ potential greenwashing behaviour. The paper provides direct evidence of greenwashing behaviour in the ESG investment product offering space. These findings are consistent with those of Harshini Shanker, author of Social Preferences of Investors and Sustainable Investing.  Shanker claims that poor Morningstar globe ratings only pretend to be socially responsible while systematically making unsustainable investments.

That’s greenwashing. Thus, socially responsible investors are not necessarily receiving what they signed up for.

CALL FOR ACTION

When investing for sustainability and impact, investors should understand what they are buying by performing the necessary due diligence. While this is a universal advice in the investment industry, it appears even more relevant due to the ESG fad.

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