Greenwashing: What Is It?

The misrepresentation of a company’s environmental policies may have ramifications for your investment portfolio.
Jul 12, 2022

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“All natural,” “eco-friendly” and “green” — we’ve seen it all before. Food, home goods and clothing companies have all jumped on the sustainable bandwagon, and it’s not just because of their undying devotion to the environment.

Greenwashing definition

Greenwashing is a misrepresentation of a product, service or investment, making something appear to be more sustainable than it actually is. Greenwashing includes eggs labeled “farm fresh,” clothing marketed as “eco-friendly” and investments labeled “green” when those claims are either exaggerated or cannot be substantiated.

“Greenwashing is virtue signaling,” says Lina Khan, a Global Design Resilience Practice Area Leader for Gensler, an architectural firm. “Ensuring that your product or service is good from an environmental and sustainability standpoint is so valued by society, but some organizations feel the need to advertise more than what they’re actually doing.”

Greenwashing's effects

Environmental, social and governance criteria are at the heart of ESG investing, which has grown significantly in popularity over the last several years. ESG criteria are factors that measure an investment’s sustainability. Unfortunately, with the rise of consumer and investor interest in ESG comes the rise in greenwashing.

This can lead some businesses, such as oil companies, to be included in funds that investors may not have expected. Critics have called ESG and other forms of sustainable investing marketing ploys or scams, noting that sustainability is just a trend that companies are trying to capitalize on.

One reason why greenwashing has been able to slip through the cracks when it comes to investment securities is that there are numerous ESG data providers. And because multiple companies offer ESG evaluations, it can be difficult to know which one to trust.

Efforts to reduce greenwashing

The Biden administration has even called for better guidelines and standardization around ESG investments. In a May executive order, the president requested that Labor Secretary Marty Walsh review previous rulings about the inclusion of ESG funds in workplace retirement plans such as 401(k)s.

The Climate Group is a nonprofit that helps companies commit to and follow through on environmental initiatives. When asked about how greenwashing impacts consumer trust, Vartan Badalian, a Transportation Analyst at the GreenBiz Group, says it’s not good for anyone.

“It’s not helping the planet or any businesses. It puts more distrust out there for consumers and investors,” Badalian says.

And because of the increased interest in sustainability, there is an increase in accountability. Badalian said he sees this increase in interest, and an increase in corporate promises, as motivating factors for companies to abandon greenwashing and keep their word.

“As climate-related social opinions get stronger, companies will have nowhere to run,” he says. “And with more aggressive policies and political opinions, you’ll see companies that were once slow to move become more aggressive with their policies, and they will have to follow through because they are putting clear timelines on climate commitments.”

How greenwashing affects investors

Greenwashed investments, or investments not being what they claim, was the biggest concern for 44% of investors when it came to ESG investing, according to recent research from Quilter, a U.K.-based wealth management service. This was followed by worries about ESG investment fees and costs (42%) and ESG investment performance (38%).

And while ESG has its critics, it also has its champions who note that any level of commitment a company is willing to make toward sustainability is better than none.

Why do companies engage in greenwashing?

According to a study from First Insight and the Baker Retailing Center at the Wharton School of the University of Pennsylvania, over two-thirds of consumers are willing to pay more for sustainable products.

First Insight and the Baker Retailing Center at the Wharton School of the University of Pennsylvania. The Sustainability Disconnect Between Consumers & Retail Executives. Accessed Jul 12, 2022.
Turns out, there’s good money in going green.

But not every company is genuine in its pursuits of a cleaner planet or more equitable society. And making false or misleading claims about “greenness” can affect investor trust.

How you can avoid greenwashing

The field of sustainable investing is still relatively new, and while industry-wide standardization may still be a long time coming, there are ways to increase the green in your portfolio (and hopefully your wallet).

Khan encourages consumers and investors to do the legwork when it comes to learning about a company’s sustainability policies.

“Follow the breadcrumbs,” Khan says. “Look at reports, look at third-party verification and do a little bit of your own homework to go beyond the tag lines of ‘sustainability’ and ‘green.’”

ESG funds. ESG funds usually publish impact reports, allowing investors to see the real-world changes their investment dollars are making. A fund’s prospectus will also show the individual companies that fund invests in, so you can see exactly where your dollars are going.

Robo-advisors. For investors who don’t have the time or desire to dive into the nitty-gritty of their investment holdings, several robo-advisors offer automated ESG investment portfolios.

Financial advisors. If you’d like professional help, you can also work with a financial advisor who has a chartered SRI counselor certification, which is a designation program designed to teach best practices for socially responsible investing.

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