What is greenwashing in investing?

Investing Insights

If you’re a purpose-driven investor, you may already be engaged in impact investing.

You’ve selected investments based on their positive environmental or social impact and the prospect of favorable returns. You’ve established a portfolio that mirrors your values. But how can you be sure that every company or fund in your investment portfolio is genuinely committed to a higher set of business standards?

Could you be “greenwashed” and not know it? It’s possible.

Greenwashing defined

In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company’s environmental, social or governance (ESG) claims. According to Chad Burlingame, CFA, CAIA, director of Impact Investing at U.S. Bank, “Greenwashing is marketing hype that applies to companies overstating their ESG efforts. It also shows up in the investment industry when a fund gets re-labeled as impact or when an investment manager repurposes it as impact.”

Companies across the globe may misrepresent their green credentials to deceive investors and consumers for economic gain or public favor. Greenwashing can be disguised in many ways:

  • An organization states it’s “green conscious,” when, in reality, it has no concrete green initiatives
  • A business invests more advertising dollars on its environmentally friendly brands than it spends on positive green practices or sustainability programs
  • A company maintains effective waste-reduction programs during manufacturing, but its end-product is harmful to the environment

How to uncover greenwashing

You don’t have to be an investigative reporter to uncover questionable greenwashing practices. Look for red flags in marketing ads, on product labels or on a company’s website:1

  • Overused industry language. “Eco-friendly” or “all natural” – claimed by thousands of companies
  • Misleading graphic. Mountains, trees and streams on plastic bottles portray environmental compassion
  • Award claims. A brand states it’s the best environmental product in the industry without proof
  • Purposefully vague text. Poorly worded language that over hypes a product and is intended to mislead
  • Seals and labels. Text featuring “award-winning product” on a simulated environmental symbol
  • Scientific terms and buzzwords. 100% biodegradable or 100% compostable product claims

Seek investment help to avoid greenwashing

If you’re new to impact investing, you may be unsure where or how to begin. Or, if your portfolio is already focused on impact investments, you may want to re-evaluate it with a critical eye to greenwashing. In any case, consider working with a financial professional as your next step.

Burlingame acknowledges, “Impact investing and its terminology can be confusing to investors. Greenwashing is an additional challenge and creates a bad investor experience. Your financial professional is a first line of defense who provides transparency and guidance.”

Companies across the globe may misrepresent their green credentials to deceive investors and consumers for economic gain or public favor.

Experienced financial professionals can serve as a safeguard against greenwashing. Ask them how they are incorporating ESG factors into their work practices. Listen for objectivity in their comments. As Burlingame asserts, “Questions should be asked of [your professional]. It allows them to highlight their corporate reputation and commitment to impact.”

ESG criteria include:

  • Environmental – factors such as climate change, energy efficiency, pollution, water scarcity or biodiversity
  • Social – factors such as human rights, gender and racial diversity
  • Governance – factors such as board composition, executive pay, audit committee, lobbying activities or political contributions

Furthermore, financial professionals review data and eliminate ambiguity in three critical investment areas when performing their due diligence:

  • Benefits – Does the investment generate non-financial ESG benefits in addition to a financial return?
  • Significance – How significant are ESG factors to the financial performance?
  • Effort – Do the results come from authentic ESG efforts or just chance?

As impact investing demands rise, the available data and reporting capabilities are growing, too. Burlingame reinforces the growth. “In the 1990s, 20 companies disclosed ESG data. Today, that number is over 9,000. The increase in data and ability to analyze it helps quantify the non-financial benefits. That allows financial professionals to go beyond screening out the bad or tilting toward the good, and instead direct capital to potential solutions.”

Investigate for greenwashing before investing

While the impact investing landscape is comprised of many ethics-based businesses and investment managers, greenwashing remains a concern due to a lack of detailed regulatory oversight. Working with a trusted financial professional to evaluate the impact claims of any business or fund manager can be critical to your investment endeavor. It may also simply provide greater peace of mind.

Learn about our approach to impact investing.