The short version
- Greenwashing happens when a company advertises that it's environmentally friendly but it isn’t.
- With ESG investing on the rise, it’s important for investors who want to invest in eco-friendly companies to be able to spot greenwashing.
- Looking for vague terms, natural imagery and lack of transparency are some of the ways investors can become aware of greenwashing.
What is the meaning of greenwashing?
Greenwashing is a communication and marketing strategy aimed to make the company appear more environmentally-friendly than it actually is. It’s when a company claims it’s “green” but isn’t actually doing anything in practice to limit its carbon footprint.
These companies often use words like “green” or “eco-friendly” to describe their products. They prominently feature green colored labels, and tout tree-planting initiatives, and other so-called environmentally-friendly activities.
But the reality is that their efforts might not actually be doing much good. In fact, they may be producing just as many greenhouse emissions as before. In other words, just because a company says it's green doesn’t mean it is.
Examples of greenwashing
The U.S. Federal Trade Commission has very specific guidelines about how things can be advertised, including environmental marketing claims. Its aim is to keep companies from misleading customers.
However, there’s a lot of room for interpretation. For example, a company can claim its bottle is recyclable even if a small component, like its cap, is not. But they can also claim that an item is 50% more recyclable than before, by merely increasing its recycled content from 2% to 3%.
Fake eco-friendly packaging
South Korean beauty-brand Innisfree was accused of greenwashing when its green tea seed serum was packaged in a plastic bottle that was then encased in cardboard with the words “Hello, I'm Paper Bottle.” The company later apologized for its marketing but still remains a prime example of greenwashing.
One less obvious example of greenwashing is tree-planting claims. Many companies participate in tree-planting programs and proudly state it on their packaging. While trees help combat greenhouse gas emissions, the actual impact of a tree-planting program can be hard to verify for many reasons.
For one, the amount of land needed to plant trees to offset the amount of emissions created by companies like Shell would need to be the size of Italy. Tree planting in some areas can also have negative consequences, such as when the UK government approved planting conifer trees in a peat bog that would have sucked up the water and dried out the land.
Another example of greenwashing is when companies jump on the “circular economy” trend by offering incentives for returned merchandise. An example of this was when fast-fashion retailer H&M set up clothing recycle bins around their stores and offered 15% off coupons for customers to drop off old clothing in an attempt to highlight the importance of recycling textiles. Critics were quick to point out the hypocrisy of a company that produces $4.1 billion of unsold clothes running a campaign to “close the loop” — while at the same time offering “thank you” coupons.
IKEA, the furniture giant that has been accused of having connections to the illegal logging industry, also offers a buy-back program that resells returned furniture to customers at a lower cost in an area of their store named “The Circular Hub.”
While recirculating furniture and recycling textiles are tip-toes in the right direction, these campaigns pale in comparison to these companies’ outsized roles in driving consumerism and overconsumption on a global scale.
Why companies greenwash
Increasing numbers of investors and consumers are concerned about the environment. And they want their money to support companies that aren’t contributing to climate change. Interest in Environmental, Social and Governance (ESG) investing is growing, with 21% of investors investing in ESG and 49% of investors interested in ESG.
It’s not just investors either. Consumers are willing to pay more for products if they are from a sustainable brand, according to GreenPrint’s 2021 Business of Sustainability Index.
Companies want to capitalize on this growing interest in environmentally conscious products. And while some companies are truly sustainable, not all are. As an investor, knowing where your money is going is important. That's why it's important to look out for signs of greenwashing from companies that claim to be ESG.
How to spot signs of greenwashing
It’s important to look at all aspects of a company when trying to spot greenwashing. Some signs of greenwashing might be obvious. But often, it’s difficult to tell when companies are trying to pass themselves off as more eco-friendly than they actually are. Here are some tell-tale signs of greenwashing:
❌Vague terms and slogans
“Green”, “natural”, “sustainable” and “eco-friendly” are all terms that have become commonplace in product marketing these days. But unless these terms are backed up with data, appropriate certifications and real-life examples, they're simply words.
A food or home goods company that claims to have natural ingredients doesn’t mean it’s environmentally-friendly. There are many ingredients that occur naturally but are actually toxic.
Images can be very powerful, especially when it comes to advertising. It’s easy to look at nature-based imagery like trees, water, or butterflies and assume that the company is environmentally-minded.
However, it's a form of greenwashing when a product incorporates these images without providing evidence to back up their claims.
For example, a car company may advertise its latest car with images of a forest and butterflies landing on flowers. That could be greenwashing, especially if the company isn't also addressing the fact that cars are among the biggest contributors to greenhouse emissions.
❌Lack of transparency
The real test to see if a company is greenwashing is to check for credentials. Check the company website for disclosures on how its products are made and its environmental impact. A company that isn’t greenwashing will be upfront and transparent about what they're doing to minimize their environmental impact.
❌Assuming ignorance from customers
Some companies might make an irrelevant claim in an attempt to make their products seem more appealing to buyers. For example, products using ozone-depleting chlorofluorocarbons (CFCs) have been banned for over 30 years, yet companies still advertise their products as being CFC-free. The claim not only positions a product as more environmentally-friendly than others — which is a form of greenwashing — it also assumes that the customer is not going to investigate further.
What to look for in truly sustainable companies
According to sustainable tech platform Clarity AI, only 3.6% of revenues of 31,000 equity funds were actually considered green (i.e. contribute to mitigating climate change).
Knowing whether or not a company is actually green can be a bit tricky. In the EU, a recent regulation known as the Sustainability Finance Disclosure Regulation (SFDR) requires extensive disclosure requirements around ESG metrics in a bid to improve transparency and prevent greenwashing.
In the U.S, the SEC is working on similar rules which would require companies to disclose a number of climate-related disclosures, including their greenhouse gas emissions.
For investors wanting to invest in green companies, it’s important to understand how and if a company is truly sustainable. A few of the things for investors to look at include:
Does the company have a report on their sustainable measures each year? Where do they manufacture and source their materials? A sustainability report will include information on the company's ESG performance, as well as its overall sustainability goals. It won’t just include information about the environment but also about how it treats its employees, and other social and governance issues, such as diversity, community service, lobbying efforts, and shareholder rights.
Material certifications and pledges
Has the company made a pledge to lower its carbon footprint and greenhouse emissions? Does it have certification from a third-party certifier, such as the Green Business Bureau, LEED, Green C Certification, Fairtrade, or B Corp, among many others?
Look for outside confirmation that the company is sustainable, rather than relying solely on what the company reports.
Research companies like Morningstar, S&P Global and Sustainalytics will often produce reports and scores of funds to determine how sustainable they actually are. While there is no universal system used to rate companies, ESG ratings are still a good starting point. These scores are a measure of the company's exposure to environmental, social, and governance risk that can be overlooked during traditional financial analysis.
Check out our article on how to know if a company is really ESG
Where to invest sustainably
If you want to invest sustainably, you can do so through a number of ways. One of the easiest ways is to invest in ESG index funds or ETFs. Many robo advisors offer sustainable investing options. These managed portfolios heavily invest in ESG companies. Some are even focused more on specific aspects of ESG, like sustainability or social issues.
You can also invest in stocks of companies that are ESG friendly. You can do your own research for companies that are limiting their environmental impact by looking for ESG reports from research firms. Or you can consult certification websites to see which publicly-traded companies have verified sustainability credentials.
The bottom line
With interest in ESG investing rising among investors, more and more companies are claiming to be green when they really aren’t. It’s important for investors to know how to spot signs of greenwashing.
This is especially true for investors who want to be more environmentally-conscious with their investment choices. Looking at ESG scores, reports and certifications can help investors identify companies that are genuinely focused on sustainability.
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