Greenwashing can damage trust and confidence in the investment industry, leading to environmental, social, and governance (ESG) fund outflows and undermining investment firms’ broader sustainability credentials and objectives. It can also result in investors misallocating assets to products or strategies that do not align with their investment goals.

This paper analyzes investment funds’ disclosures related to ESG information through the lens of investors to understand the nature of disclosure issues that could give rise to a perception of greenwashing. We examined product disclosures for a sample of 60 investment funds that are marketed to retail investors and that incorporate ESG factors into the investment process. The sample includes 30 funds from the European Union and 30 funds from North America.

It is important to note that a perception of greenwashing can arise when investors struggle to understand the underlying sustainability characteristics of a fund, irrespective of the intent or veracity of the disclosures. Comprehension of the sustainability characteristics of a fund is challenging when there are inconsistent disclosures, omissions of key information regarding the sustainability goals or strategy, unsubstantiated sustainability claims, or undue emphasis of certain features that could appear to exaggerate the fund’s sustainability characteristics.

Summary of Key Findings

• We found five instances of ESG-related information that would likely confuse an investor and may create a perception of greenwashing. Inconsistency of disclosures (where information provided in a given document does not align with the information provided elsewhere) was the primary issue encountered in the sample.
• Greenwashing is difficult to uncover and prove on the basis of documentation alone. Access to essential internal records and/or third-party research is not available to retail investors. In addition, analysis requires judgment and thus may result in different conclusions on the perception of greenwashing.
• The context-specific nature of greenwashing risks can make it difficult for investors to obtain a clear picture of how ESG factors are incorporated into the investment process, objectives, and stewardship activities of a retail fund.
• We observed problematic disclosures related to fund names, screening criteria, fund reporting, ESG terminology, and ESG-related impact claims and developed recommendations to address these issues.