The sustainable and impact investing market has grown to nearly $10T in assets under management in recent years and is expected to grow to over $30T by 2026. These investments, geared towards major societal issues are an opportunity to create transformative change and align investments with your values. The recent proliferation of greenwashing poses significant risks to the legitimacy and effectiveness of the entire sustainable investing sector. Read on to see how regulatory changes, methodical investment approaches, and new initiatives like Climate Cash™  can help investors navigate a complex financial landscape. 

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The Growth of Social and Environmental Investing Strategies

Driven by strong consumer and investor demand, impact investments are increasingly gaining traction in corporate America. This trend is characterized by social and sustainable investing, where companies’ investment strategies promote social and environmental benefits while pursuing yield. Environmental, Social, and Governance (ESG) criteria, and other sustainable investment lenses have become pivotal in shaping such investment decisions throughout the financial landscape, reaching an estimated $9 trillion in public markets and more than $1 trillion in private markets. This growth has increased the popularity of sustainable and ESG funds and dispelled the myth that social and environmental investments yield lower returns. 

Capital investments geared toward addressing major societal issues are an opportunity for lasting change in areas like the widening wealth gap, and disparities in gender and racial equity, as well as environmental concerns. With asset managers expecting to increase their ESG-related assets under management to US$33.9T by 2026, they also present significant opportunities for financial gain. 

Challenges in Sustainable Investing and the Rise of Greenwashing

As more sustainable investments come to the market, several challenges including the difficulty in measuring actual impacts, inconsistencies in ESG scoring methodologies, and a lack of uniform regulations have become apparent. This has resulted in a transparency gap in instrument labeling, reporting, and data disclosure, leaving some stakeholders and investors unable to verify whether the outcomes are genuine and if companies truly uphold their ethical commitments. Consequently, concerns about greenwashing are growing among investors.

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According to the European Securities and Markets Authority (2023), the working definition of greenwashing in investments is “a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants.”

Although greenwashing is not new, it has intensified in recent years, as more companies seek to align themselves with this growing market trend. This phenomenon not only undermines investor trust but also poses significant risks to the legitimacy and effectiveness of the entire sustainable investing sector. One Morgan Stanley study found that while investors anticipate increasing their sustainable investments portfolio in 2024, 60% also expressed concerns about greenwashing and the lack of transparency and trust in reported ESG data. 

Regulatory Responses to Greenwashing

These developments emphasize the need for consistent and clear standards in ESG reporting and increased regulation to ensure that the marketed social and sustainable investments genuinely deliver impactful results. Recent efforts include: 

• SEC Regulatory Actions:
  • Updated Names Rule: The SEC updated the 20-year-old Names Rule to prevent misleading fund names. Under the new rule, if a fund’s name suggests a specific investment focus, it must adopt a policy to invest at least 80% of its assets in that focus, reducing the risk of deceptive or misleading implications.
  • Climate and ESG Enforcement Task Force: This task force is dedicated to identifying ESG-related misconduct. It focuses initially on spotting significant gaps or inaccuracies in climate risk disclosures under existing rules and scrutinizes disclosure and compliance issues related to the ESG strategies of investment advisers and funds.
• The Federal Trade Commission’s Green Guides:
  • The Federal Trade Commission (FTC) has also been active in guiding sustainable practices through its Green Guides, which are designed to help marketers ensure that the claims they make about the environmental attributes of their products are truthful and non-deceptive. Although not solely focused on ESG investments, these guides set a precedent for transparency and can influence broader regulatory approaches in the financial sector.

As regulations evolve and oversight mechanisms become more robust, the investment community can look forward to greater clarity and trustworthiness in ESG reporting, significantly reducing the prevalence of greenwashing.

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Identifying Authentic Sustainable Investments

While concerns about greenwashing are significant, it is important to recognize that not all sustainable funds are fraudulent—many truly advance climate change initiatives and support communities in need. To distinguish these authentic investments, corporate investors should adopt a systematic approach:

1. Prioritize Transparency: Choose investments that offer clear, comprehensive reporting. This level of transparency ensures that the environmental and social claims made are not only genuine but are also backed by verifiable actions and results.
2. Align with Global Standards: Ensure that investments align with internationally recognized standards and benchmarks. Tools like the Global Reporting Initiative (GRI), the Sustainable Accounting Standards Board (SASB), or frameworks that support the United Nations Sustainable Development Goals (SDGs) are a good start. These frameworks provide structured guidance and criteria that help verify whether an investment is truly sustainable and ethically managed.
3. Engage in Active Due Diligence: Beyond checking for standards compliance, conduct thorough due diligence. This involves assessing the investment’s impact strategy, the track record of the managing entity, and the actual outcomes versus stated goals. Things to look out for:
   1. Assess whether institutions have a history of serving underserved communities that are disproportionately affected by climate change, rather than just entering the market to capitalize on trends.
   2. Evaluate if the proposed solutions are both responsive and responsible, tailored to the unique needs of the communities they serve and importantly, accessible to all,  rather than merely focusing on scalability.
4. Monitor and Engage: Once an investment is made, ongoing monitoring and engagement are crucial. Participate in shareholder meetings, review regular impact reports, and stay informed about the sectors and regions where you invest. This continuous involvement helps ensure that the fund remains aligned with your sustainability goals and can prompt corrective action if needed.

A Model for Sustainable Investments: Climate Cash^TM

Climate Cash™ offers a robust example of a sustainable cash management solution that genuinely combats climate change while avoiding greenwashing. This solution provides corporate clients the ability to place FDIC/NCUA-insured deposits across a portfolio of mission-driven banks and credit unions while meeting yield and liquidity targets. 100% of deposits placed go to institutions that fund carbon reduction activities in low to moderate-income communities and communities of color through projects like community solar, commercial retrofits, energy-efficient utilities, and electric vehicle auto-loans and maintenance support.

Solar installations by Flywheel Development, a sustainable development company supported by mission-driven lender, Locus Bank

Climate Cash Institutions are vetted not only for their green lending initiatives but also for their responsiveness to community needs, as per CNote’s proprietary impact framework. These institutions have shown their work in close collaboration with the groups they serve, ensuring that the financial products provided are not only necessary but also tailored to fit the unique circumstances of underserved borrowers. This approach helps avoid the pitfalls of one-size-fits-all solutions, offering instead affordable and flexible financing products that uplift local economies.

In addition to centering community voice, and expertly meeting the needs of underserved communities with tailored products and programs, Climate Cash™ partners are committed to transparent impact. Quarterly data on green financing activities such as solar lending, EV-related lending, and energy efficiency lending are provided by CNote’s participating Climate Cash partners and reflected in regular impact reports back to CNote clients. 

Climate Action in Communities

Locus Bank, a CNote partner depository institution and a pioneer in green lending, operates a Solar Loan Program that is deeply aligned with community needs. This program targets small commercial solar developers across North Carolina to New York. Locus is making an outsized impact with its loan program, as the loan amounts requested are typically too small for larger banks, and the borrowers often lack the capitalization needed for traditional loan approval. 

Locus is a creative and dedicated problem solver. Within the program, their team adapted to providing unique loan structures to meet borrowers where they are to ensure more solar options were made available and affordable in low-income communities.

Conclusion

By embracing rigorous transparency,  and accountability through initiatives like Climate Cash™, investors can not only navigate the complexities of the financial landscape but also contribute to a genuinely sustainable future that meets both environmental and social objectives

Disclaimer: This information should not be relied upon as research, investment or financial advice. This material is strictly for illustrative, educational, or informational purposes and is subject to change. CNote Group, Inc. is not a bank, a credit union, or any other type of financial institution. CNote is not a registered investment advisor with the Securities and Exchange Commission (SEC) or a broker-dealer authorized by the Financial Industry Regulatory Authority (FINRA). CNote is not a legal, financial, accounting or tax advisor. CNote does not negotiate interest rates. Climate Cash is not a security or investment. Climate Cash deposits are insured by the FDIC or NCUA, subject to the terms and conditions of the Climate Cash agreements. We encourage you to consult with a financial adviser or investment professional to determine whether or not the CNote platform makes sense for you.