Greenwashing is being used to attract inflows, study confirms

Posted by Robin Powell on December 14, 2021

Greenwashing is being used to attract inflows, study confirms



ESG is one of the fastest growing investment trends in history. Bloomberg Intelligence estimates that by 2025, more than $50 trillion will be invested with an ESG mandate. It’s not surprising therefore that fund management companies are busy bringing out new ESG funds and converting mainstream funds into ESG ones. But new research from Finland suggests that investors should exercise caution when assessing these repurposed funds. Generally, the researchers found, it’s funds that are failing to attract inflows that tend to be converted into ESG products. In many cases, they found, the relabelling is self-designated and inappropriate — in other words, the funds’ holdings are very similar to non-ESG peers. For LARRY SWEDROE, it’s another reminder of the risks of greenwashing and the importance of due diligence when choosing funds to invest in.


Environmental, social and governance (ESG) investing is the most significant investment theme of recent times. According to The Forum for Sustainable and Responsible Investment (SIF) and Principles for Responsible Investment (PRI), about $17 trillion, or one-third of the total assets under management (AUM) in the U.S., are invested according to some social responsibility strategy in 2020, a fivefold increase in just the last 10 years. At the same time, the number of investment asset management firms in the U.S. committed to principles of responsible investment has grown to over 400, a tenfold increase.

In an effort to stand out, ESG-related investment products are often marked with labels such as ESG, CSR (corporate social responsibility), SRI (socially responsible investing) and sustainability. While labelling is an essential marketing tool in consumer products, it can also be used to mislead through “greenwashing” activities—the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.

Markku Kaustia and Wenjia Yu contribute to the sustainable investing literature with their September 2021 study, Greenwashing in Mutual Funds, in which they investigated mutual funds’ potential greenwashing behaviour.

They studied three questions:

1) Is mere self-designation as a sustainable mutual fund rewarded with higher inflows even when it is at odds with a third-party sustainability rating based on fund holdings?

2) What drives the decision to repurpose a fund into an ESG fund?

3) What happens to these funds after repurposing?

To measure the funds’ objective ESG level, they used Morningstar’s Sustainability Ratings (globe ratings), which aggregate Sustainalytics’ ESG ratings of listed equities in the funds’ holdings.Their data sample for determining if a fund was repurposed to an ESG fund covered the period 2010-June 2020. Following is a summary of their findings:

  • In 2010 only about 1.6% of funds were ESG funds, and 6% of fund families were ESG families. The percentage increased to around 12% and 17%, respectively, at the end of 2019. 
  • From 2010 to 2016, the rate of increase in ESG fund percentage was only 1 percentage point, while from 2016 to 2019, the increase was almost 10 percentage points.
  • Funds profiled as ESG-based received higher inflows (on average, 0.8% of assets under management) compared to other similar funds — this was true also for ESG-labelled funds having inferior objective ESG profiles (based on Morningstar Sustainability Ratings) and applied to both retail and institutional funds. The effect was very large in relative terms, representing a fourfold increase for retail funds and ninefold for institutional funds.
  • There was a favourable effect on flows for ESG-labelled funds having inferior objective ESG profiles — evidence of greenwashing. These potential greenwashing ESG retail and institutional funds received 1.4% and 3.6%, respectively, of AUM higher-category-adjusted monthly flows than non-ESG retail and institutional funds with similar profiles.
  • The ESG repurposing strategy is more likely in funds with low flows but high returns.
  • There was a much smaller ESG labelling effect (investors are becoming more aware of greenwashing activities) over the most recent 2018-2020 period. The self-designated label no longer benefited potential greenwashing ESG institutional funds — evidence that institutions learned about greenwashing behaviour. The ESG label still brought extra flows into retail funds even if the objective globe rating disagreed with the label. However, the effect was smaller, about a quarter of that of the earlier period.
  • Most ESG repurposing happened in the recent three years. 
  • Fund families especially tend to convert funds to ESG funds those funds whose ability to attract inflows has been lagging (statistically significant at the 1% confidence level). 
  • On average, repurposed funds reduced their holdings in ESG-unfriendly industries, such as tobacco and oil production. However, around 20% of the ESG repurposing funds actually increased their holdings in ESG-unfriendly industries. 
  • Repurposed funds experienced essentially no change in future flows, indicating no obvious short-term business benefits to repurposing.

Kaustia and Yu concluded that their findings provide “direct evidence of greenwashing behaviour in the ESG investment product offering space”. Their findings are consistent with those of Harshini Shanker, author of the 2019 study Social Preferences of Investors and Sustainable Investing. Among her findings were that poor Morningstar globe ratings are only pretending to be socially responsible while systematically making unsustainable investments — they are greenwashing. Thus, in a large percentage of cases, socially responsible investors were not receiving what they signed up for. 


Investor takeaway

The takeaway is that when investing for sustainability, investors should perform thorough due diligence, making sure that a fund walks the talk. That’s the best way to minimise the risks of greenwashing. 


For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.  Certain information is based upon third party sources and may become outdated or otherwise superseded without notice.  Third party information may become outdated or otherwise superseded without notice.  By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth® or Buckingham Strategic Partners® collectively Buckingham Wealth Partners.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy or adequacy of this article.  LSR-21-179


LARRY SWEDROE is Chief Research Officer at Buckingham Strategic Wealth and the author of numerous books on investing.



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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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