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Researchers' tool to detect 'greenwashing' wins 'Eureka' prize

04 December 2023

Business & Finance

Dr Angie Andrikogiannopoulou and Dr Filippos Papakonstantinou were awarded the ‘Eureka’ prize after taking part in a three-month long TechSprint challenge run by the UK’s Financial Conduct Authority.

The challenge is part of an initiative by the Global Financial Innovation Network of regulators and related organisations to encourage innovative solutions that will improve trust in the Environmental, Social and Governance (ESG) driven investment market.

The King’s Business School duo were one of just thirteen teams selected to take part in the TechSprint and were the only university-based team to participate, with the rest of the teams coming from the FinTech sector.

Their entry, the ESG ID app, was developed in collaboration with multiple international regulators. It uses text-mining techniques to identify discrepancies between the voluntary description that funds provide about their ESG commitments in their investment prospectuses, and the more objective measures that can be obtained by analysing information and ratings related to the individual stocks that they hold in their portfolios.

Regulators around the world are looking to introduce regulations against greenwashing because it misleads investors and frustrates efforts to allocate capital to businesses that are genuinely improving their environmental and social impact. We hope that our app can help enforce future regulation by identifying and flagging potential cases of greenwashing that warrant further investigation.– Dr Angie Andrikogiannopoulou

The app was based on their research paper: “Discretionary Information in ESG Investing: A Text Analysis of Mutual Fund Prospectuses”. Their analysis of data on US mutual funds found that greenwashing was more prevalent after 2016, when the Paris Climate Change Agreement was signed, and among funds with lower past flows. According to their findings, in 2011 around 1.2% of funds could be categorised as ‘greenwashers’. By 2020, around 10% of funds included ESG-related language in their prospectuses and 5.6% of funds could be categorised as greenwashers.

In our analysis, we found that investors respond strongly to ESG-related text in funds’ voluntary disclosures, but by 2020 more than half of the funds using such language were likely ‘greenwashing’. We want to help investors differentiate between greenwashing funds and those whose investments truly live up to their claims.– Dr Filippos Papakonstantinou