While some companies make public commitments to environmental responsibility, not all these claims are created equal. Some businesses engage in “greenwashing,” a tactic that can mislead you into believing their operations are more environmentally sound than they truly are. If you’re looking to align your portfolio with environmental, social and governance (ESG) principles, understanding how to spot greenwashing is necessary to ensure your capital has real impact.

What is greenwashing?

The term greenwashing originated in the 1980s, when some hotels encouraged guests to reuse towels “for the environment.” In reality, this was a cost-cutting measure, and the hotels were making minimal efforts to reduce their environmental impact.

Some companies may focus on small positive actions and misrepresent their impact while masking larger negative actions, leading you to make decisions based on faulty evidence. For example, a common concern around greenwashing today involves fossil fuel companies highlighting small investments in renewable energy while the bulk of their operations generate substantial greenhouse gas emissions.

Identifying greenwashing tactics

Serious sustainability efforts are supported by transparent reporting, clear targets for reducing greenhouse gas emissions and independent verification. Reviewing a company's full environmental impact, not just its marketing materials, can provide a more accurate picture of its ESG performance.

If you’re interested in pursuing social impact goals, it’s essential to conduct thorough due diligence on the companies you’re considering. Red flags include vague, unsubstantiated claims, such as "eco-friendly" or "natural," the use of nature imagery without supporting data and emphasizing a limited “green” initiative without addressing the company’s full carbon emissions profile.

How greenwashing can hurt companies

Once consumers and investors uncover the truth, greenwashing can damage a brand's reputation. Beyond reputation loss, there can be legal consequences, as regulatory bodies may crack down on false environmental claims. For example, misleading advertisements about carbon offsets or renewable energy investments can lead to lawsuits and fines.

Investing in companies that greenwash can undermine any values-based investing strategies you may be pursuing. After all, progress toward lowering carbon emissions and promoting renewable energy adoption requires that investors allocate capital to companies making verifiable, material improvements.

Third-party rating systems and certifications

If you have questions about a company’s sustainability claims, look for trusted third-party certifications. Standards such as B Corp Certification, LEED (for sustainable building practices) and Fair Trade give an independent validation of a company’s environmental responsibility. These programs require rigorous reporting and accountability, making it harder for companies to rely solely on marketing tactics.

Or consider the following organizations, which provide frameworks and standards for corporate ESG reporting that you may find helpful:

  • Task Force on Climate-Related Financial Disclosures (TFCD)
  • Global Reporting Initiative (GRI)
  • Sustainability Accounting Standards Board (SASB)
  • Corporate Sustainability Reporting Directive (CSRD)

Third-party ratings and ESG data providers also give an assessment of a company’s sustainability practices. They offer objective metrics like carbon emissions reduction targets, renewable energy usage and overall environmental impact.

As companies respond to the demand for ESG investing, instances of greenwashing abound. If you’re interested in protecting your portfolio and increasing your impact, take the time to look for common greenwashing tactics, perform due diligence and leverage third-party evaluations. Also consider reaching out to a professional who can help you ensure your portfolio suits your goals.

At a glance

  • Greenwashing is when a company exaggerates or misrepresents its environmental efforts to appear more sustainable than it actually is.
  • Thorough due diligence and transparent reporting are key to spotting genuine sustainability efforts.
  • Third-party certifications, like B Corp and LEED, offer independent validation of ESG commitments.

See how a ۶Ƶ Advisor can help you create an ESG-focused portfolio.

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