Sustainable investing is gaining in popularity. As a result, investment providers have ramped up their offerings of Environmental, Social, and Governance (ESG) products. However, investors must take a closer look and scrutinize anything with the ESG label to ensure it truly holds sustainable underlying positions.

For example, one index fund has “climate change” in its name while holding some of the world’s largest oil producers and multinational automakers as positions. A specific holding in this fund is carmaker Daimler, included solely because the company made a statement about the risks and opportunities posed by climate change and acknowledged the goals of the 2015 Paris Agreement. This somewhat contradictory way of thinking demonstrates the need to look more closely “under the hood” as you look for ESG holdings.

Investment providers need to label products more clearly. Increased transparency will reduce “greenwashing,” which is when a company misleads customers and investors by falsely marketing its products and services as environmentally friendly when, in reality, they are far from it. ESG investing is partially subjective based on the beholder’s viewpoint. Some investors prefer to own shares of an environmentally dubious company, such as Daimler, to vote at annual meetings to support sustainable initiatives and affect change at the company level.

One potential solution to greenwashing is policing sustainable investing. On March 10, 2021, the European Union (“EU”) introduced the first rigorous attempt to prevent this mislabeling practice. These new rules are part of a more comprehensive series of green finance regulations and will effectively categorize every investment product as either sustainable or non-sustainable. Managers who want to market their offerings as sustainable will be subject to strict disclosure requirements.

The impact of the EU’s recently released green regulations will affect change throughout the investment industry, hopefully for the better. It appears to be a step in the right direction, but only time will tell.